Picture this. It is late May. You have just finished a long week running your business, and your accountant has sent through a draft tax return. You scan the rental property section, thinking about your Investment property deductions 2026, and something feels off. You refinanced in February, did some work on the Bentleigh property in March, and let your brother stay there for two weeks over summer. None of that feels simple. And the ATO has been all over rental properties in the media lately.
Melbourne property investors are facing a tighter compliance environment in 2026. The good news is that the path forward is still clear when you know what you can claim, what you need to spread over time, and how to keep records that stand up to scrutiny.
Also worth knowing up front: the ATO can apply administrative penalties for tax shortfalls, calculated as a percentage of the understated tax. Under the law, these rates vary based on behaviour. It can be 25 percent for failure to take reasonable care, 50 percent for recklessness, and 75 percent for intentional disregard of the law. General interest charges also apply to any shortfall. That is not here to scare you. It is here to remind you that getting this right is worth the effort.
What You Can Claim: A Quick Reference
Immediate deductions (typically in the year incurred)
- Loan interest on investment borrowings (to the extent the loan is used to produce rental income)
- Property management fees and landlord insurance
- Council rates, body corporate fees, and eligible repairs and maintenance
- Advertising for tenants and lease related legal fees
Deductions claimed over time
- Depreciation on eligible plant and equipment (Division 40)
- Capital works deduction at 2.5 percent per year for eligible construction costs (Division 43)
- Borrowing expenses spread over five years or the loan term, whichever is shorter
Often missed
- Quantity surveyor fees for a depreciation schedule (generally deductible)
- Accounting fees related to managing investment income and tax affairs
- Interest on loan splits and redraws used solely for investment purposes (with clean traceable use)
Keep in mind: the tax outcome always turns on the purpose of the expense and the facts. The labels on your bank statement do not do the ATO’s job for them.
What Changes for 2026
The ATO has flagged rental properties as a key compliance focus for the 2025 to 2026 tax year. In practical terms, that means increased data matching, more attention on holiday homes, and closer scrutiny of interest deductions where loans have been refinanced, consolidated, or redrawn.
Holiday homes are under particular pressure. The ATO is looking closely at properties with low occupancy relative to claimed expenses, and situations where personal use has not been correctly excluded. If you or your family used the property, or you let someone stay below market rent, those days can affect your deduction entitlements. It is not about shame. It is about apportionment.
Interest apportionment is also getting more attention. When you refinance and roll in personal debt, or redraw from an investment loan for private purposes, only the portion of interest linked to income producing use is deductible. If you are the kind of person who likes a checklist before you lodge, the ATO Tax Time Toolkit for Investors is worth twenty minutes.
The Big Wins: Deductions That Move the Needle
For many negatively geared investors, loan interest is the biggest deduction on the page. If your investment loan balance is $650,000 at 6.5 percent, that is roughly $42,250 in interest per year. At a marginal rate of 39 percent including Medicare levy, the tax saving is around $16,500. The numbers add up fast, which is exactly why the ATO pays attention to whether the loan has been used purely for investment purposes.
Depreciation is where landlords regularly leave money on the table. A Carnegie business owner we work with owns a rental in Bentleigh, purchased for $950,000 with a $700,000 loan. After commissioning a depreciation schedule, they identified $9,800 in annual depreciation claims they had never made. That translated to an additional $3,800 in tax savings each year. The quantity surveyor report cost $770. It paid for itself very quickly.
Borrowing expenses are another common miss, especially after refinancing. If your borrowing costs are more than $100, they are generally claimed over five years or the loan term, whichever is shorter. This includes loan establishment fees, certain lender fees, mortgage broker fees, and title search costs. Many investors incorrectly claim these in full in year one, then wonder why the ATO asks questions later.
Interest and Loans: Claim Every Cent Correctly
The complications usually begin when you refinance, redraw, or consolidate.
If you redraw $50,000 from an investment loan to renovate your family home, the loan becomes mixed purpose. Only the interest attributable to the portion used to produce rental income remains deductible. The interest on the private portion is not deductible. And once a loan is mixed, it tends to stay messy unless you take deliberate steps to separate it.
A practical example: your loan sits at $600,000 total but $50,000 relates to private use. That means 91.7 percent of your interest is deductible. On $39,000 in annual interest, you can claim $35,763, not the full amount.
Two advisor tips we give clients all the time:
- Keep investment loans and private loans separate. Loan splits are your friend when used properly.
- Keep clean evidence of what each drawdown funded. If you cannot trace it, you will not enjoy the ATO conversation.
If you refinanced recently and are unsure whether your loan structure is correct, sort this out before lodging your return. It is one of the most common and costly errors we see.
Depreciation Demystified: Fixtures, Buildings, and Schedules
Depreciation is not one thing. It is two different systems that often get lumped together.
Division 40: Plant and equipment
This covers eligible depreciating assets like dishwashers, hot water systems, blinds, and some flooring. Each asset has an effective life and is depreciated accordingly.
Under changes introduced in section 40-27 of the ITAA 1997, you generally cannot claim depreciation for second hand plant and equipment in a residential rental property purchased after 9 May 2017. These limitations do not apply if you purchase a new property, a commercial property, or if your property use meets the definition of carrying on a business. This is one area where a quick assumption can be expensive, because the rule is very fact dependent.
Division 43: Capital works
This covers the building structure and certain fixed improvements. If construction commenced after 15 September 1987, you may be able to claim 2.5 percent of eligible construction costs each year for up to 40 years.
You do not always need the original builder’s invoice to support a Division 43 claim. A quantity surveyor can estimate eligible construction costs, and the ATO generally accepts a properly prepared estimate.
If your previous accountant never set up a depreciation schedule, you may be able to recover missed claims by requesting amendments, subject to the amendment time limits that apply to you. Whether that is worth pursuing depends on the amounts involved, the years affected, and your circumstances. It is a conversation worth having before you assume it is too late.
Repairs or Improvements: Avoid This Costly Mistake
This is the area where we see the most genuine confusion, and the ATO knows it.
Here is a simple guide:
Scenario | Classification | How it is claimed
- Replaced a broken tap with a similar tap | Repair | Immediate deduction
- Replaced all taps with premium fittings | Improvement | Capital works at 2.5 percent per year (or depreciation where applicable)
- Painted the property right after purchase to fix pre existing wear | Initial repair | Generally capital, not immediate
- Fixed storm damage to the roof | Repair | Immediate deduction
- Added a new deck | Improvement | Capital works at 2.5 percent per year
The “initial repair” trap catches many investors. If you buy a property and immediately fix things that were already in disrepair at purchase, the ATO can treat those costs as capital in nature. The logic is that the purchase price already reflected the condition of the property.
If you renovated the kitchen, you almost certainly cannot claim it all this year as an immediate deduction. But you may be able to claim it over time, often through capital works at 2.5 percent from when the work is completed, and sometimes with separate treatment for eligible depreciating assets. Keep every invoice and a clear description of the work. Vague descriptions like “reno” do not help anyone later.
Melbourne Landlords: The Local Rules That Matter
Victorian property investors face obligations that interstate focused resources consistently ignore.
Victorian land tax applies based on the taxable value of landholdings in Victoria, subject to thresholds and rates that can change over time. For most passive investors, Victorian land tax on a residential rental property is not deductible, as it is generally considered a cost of holding the asset rather than an expense incurred in producing rental income. However, if your property activities are on a scale that constitutes a business, it may be deductible as a business expense under section 8-1 of the ITAA 1997. Either way, it is a significant cash outflow that belongs in your investment planning.
Negative gearing allows a net rental loss to offset other income in many cases, including salary or business income, depending on your circumstances and structure. In a high interest rate environment, those losses can be larger, which increases the tax effect. Just remember, the tax outcome is a by product. Cash flow still matters.
When you eventually sell a property held for more than twelve months, you may be eligible for a Capital Gains Tax discount. Under Division 115 of the ITAA 1997, this discount is 50 percent for individuals and trusts. Superannuation funds may be eligible for a one third discount. Companies are not eligible for the CGT discount. This is one of the reasons ownership structure is not a set and forget decision.
Angkor CA works with investors across Melbourne and the Mornington Peninsula, including Carnegie, Caulfield and Brighton. Understanding local property values, rental yields, and Victorian state tax obligations is part of what we bring to every client conversation.
ATO Red Flags in 2026
The ATO’s data matching capabilities are sophisticated. They receive data from rental platforms, financial institutions, state revenue offices, and property managers. If the numbers do not make sense together, the ATO will not assume you made an honest typo. They will ask.
A common error is claiming a full year of deductions when the property was vacant and not genuinely available for rent. You can generally claim deductions during vacancy if the property was genuinely available for rent and you were taking reasonable steps to rent it out. If it was off the market for private use or sitting there with no real attempt to secure a tenant, expect questions.
Holiday homes with low rental income but high expense claims can attract attention, particularly where private use days have not been excluded.
Incorrectly apportioned interest on mixed purpose loans is a growing audit area. It is also one of the easiest issues to avoid with the right loan splits.
And a quick reminder that still catches people: travel to inspect your residential rental property is generally not deductible for individual landlords. This changed in 2017 and is still being claimed by some investors who have not updated their approach.
Records and Proof: Make Your Return Defensible
Keeping good records is not just practical. It is a legal requirement.
Section 262A of the ITAA 1936 requires business records to be kept for at least five years. For capital gains purposes, Division 121 of the ITAA 1997 requires you to keep records of every transaction related to the acquisition and disposal of your property, as well as costs associated with improving it. Your records must be sufficient to allow your tax position to be readily ascertained.
In plain English, this is what you should keep in a rental property folder:
- Loan statements and refinance documents
- Annual rental statements or property manager ledgers
- Invoices and receipts for repairs, maintenance, and improvements
- Depreciation schedule and quantity surveyor report
- Evidence the property was available for rent during vacancy, such as listings and agent communications
- A simple log of private use days and below market rent periods, if relevant
When you do this properly, tax time stops feeling like guesswork.
Your 2026 Action Plan Before 30 June
- Confirm your loan splits and identify any mixed purpose borrowings
- Commission or review your depreciation schedule
- Count and record private use days for any holiday home or family use
- Check whether any redraw amounts were used for private purposes
- Review your Victorian land tax position, particularly after purchases, sales, or changes in ownership structure
- Gather receipts and invoices for repairs, maintenance, and improvements, with clear descriptions
- Review prior year returns for missed claims, and discuss amendment options based on your amendment period
None of this needs to be complicated. With the right structure and records in place before 30 June, the lodgement process is far more straightforward. Better still, you can make decisions earlier, rather than discovering issues after the return is already drafted.
Frequently Asked Questions
What investment property expenses can I claim immediately?
Loan interest (to the extent the loan is used to produce rental income), property management fees, landlord insurance, council rates, and eligible repairs and maintenance are generally deductible in the year incurred. Capital improvements and construction costs are typically claimed over time.
How much depreciation can I claim?
It depends on the age of the building, eligible construction costs, and what assets are in the property. Annual claims can range from a few thousand dollars to much more for newer properties. A quantity surveyor can provide an estimate that aligns with ATO expectations.
Can I claim interest if the property was vacant?
Often yes, if the property was genuinely available for rent and you were taking reasonable steps to rent it. If it was unavailable due to private use or not truly on the market, you may need to apportion or exclude claims.
What happens if I made a mistake in prior years?
If you have missed claims, you can request an amendment to your tax return. The standard time limit for amendment is generally two years for individuals and small businesses. A four year amendment period applies to taxpayers with more complex affairs. The right move depends on your situation, the years involved, and the size of the adjustment.
Can I claim renovation costs?
Not as an immediate deduction in most cases. Renovations that improve rather than restore the property are generally capital in nature and may be claimed over time, often at 2.5 percent per year for eligible capital works from when the work is completed. Some components may be treated differently if they qualify as depreciating assets.
Let’s Make Sure Your Return Is Right Before You Lodge
Owning an investment property is not just about claiming more deductions. It is about claiming the right ones, structuring your loans properly, and keeping records that hold up under scrutiny.
Before you lodge your 2025 to 2026 return, it is worth sitting down with an advisor who understands both the ATO rules and the Melbourne property market. At Angkor CA in Carnegie, we work with business owners who want a proper strategy, not just a list of expenses.
Call us on 1300 888 168 or email [email protected] to book a tax strategy review before 30 June.Disclaimer: This article contains general information only and does not constitute professional advice. The information is not intended to be a substitute for tailored advice that considers your individual circumstances. Please contact us for a personal consultation.