If you own an investment property, the ATO’s message for 2025 is unambiguous: get your deductions right, or expect a closer look. The error rate for rental property claims remains stubbornly high, with the ATO reporting mistakes in up to 90% of reviewed returns. This year, several areas are under particular scrutiny, not just the usual suspects, but also some new developments that property investors need to be aware of.
One of the most common errors is incorrectly claiming interest on loans. If you’ve redrawn funds from your investment loan for personal use, such as a holiday or a new car, only the interest relating to the investment portion is deductible. The ATO expects you to keep clear records and apportion interest accurately. Blurring the lines between private and investment use is a sure way to attract attention.
Another frequent pitfall is confusing repairs and maintenance with capital improvements. Repairs (like fixing a leaking tap or replacing a broken window) and maintenance (such as pest control or repainting a wall) are generally immediately deductible. However, capital improvements — think new kitchens, bathrooms, or extensions — must be claimed over several years as capital works. The ATO is particularly wary of large “repair” claims made soon after a property is purchased, as these often relate to pre-existing issues or significant upgrades.
The following table helps differentiate these expenses:
| Expense Type | Definition / Purpose | Tax Treatment | Key ATO Scrutiny Point |
| Repair | Restores asset to original condition due to damage | Immediate deduction | Initial repairs on new purchases |
| Maintenance | Prevents deterioration or keeps property in condition | Immediate deduction | Routine work vs. capital improvement |
| Capital Improvement | Enhances property beyond original state or extends its life | Depreciated over time | Large renovations, new additions |
If you own a holiday home, be careful about claiming deductions for periods when the property wasn’t genuinely available for rent. The ATO looks for evidence of active marketing and competitive pricing. If you or your family used the property, or if it was only listed at unrealistic rates, you can’t claim deductions for those periods.
Joint ownership brings its own set of challenges. Income and expenses must be split according to the legal ownership share; not whichever owner is in the higher tax bracket. The ATO is increasingly checking for cases where claims are skewed to maximise tax benefits. If you own 50% of a property, you can only claim 50% of the expenses—no exceptions.
This year also sees the introduction of new incentives for “build to rent” developments. From 1 January 2025, eligible projects can access a reduced Managed Investment Trust (MIT) withholding tax rate of 15% (down from 30%) and an increased capital works deduction rate of 4% per year (up from 2.5%) for qualifying new developments. While these measures are designed to boost housing supply, their novelty means the ATO will be watching early adopters closely. If you’re considering these incentives, make sure you understand all the eligibility rules and keep thorough documentation to avoid future headaches.
The ATO’s data-matching capabilities are more advanced than ever, drawing on information from banks, rental bond boards, and other sources. If your claims look out of step with your circumstances, or if your records are patchy, you’re at risk of review.
With the ATO’s spotlight firmly on investment property deductions, a careful and honest approach is your best defence. If in doubt, have a chat with us. Getting it wrong could prove far more expensive than getting it right from the start.
