Tax Tips: Investment Properties Repairs Vs Capital Improvements
There is often misunderstanding from taxpayers with investment properties regarding repairs, maintenance and capitals improvements. These are in fact all tax deductions, however the way you can claim deductions for repairs and maintenance differs to capital improvements. Therefore, it is essential to understand these differences to ensure you are meeting your tax obligations while also maximising your tax deductions.
What is a repair?
Generally, for a deduction to be considered a repair there must be a relation directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs costs can be claimed in full in the year the cost is paid.
Examples:
Replacing damaged gutters from a recent storm
Repairing electrical appliances
Replacing a broken window
Replacing broken roof tiles
Replastering a damaged wall
What is maintenance?
Maintenance involves keeping your property in a tenantable condition. It includes any works that prevent or fix deterioration. Similar to repairs, maintenance costs can be claimed in full in the year it was paid for.
Examples:
Repainting faded or damaged walls
Oiling and cleaning a deck
Plumbing
Cleaning a swimming pool
Pest control
What is capital improvement?
An improvement is considered anything that makes an aspect of the property better, more valuable, or more desirable, or changes the character of the item on which works are being carried out. Improvements can be either capital allowances (depreciable asset) or capital works (structural improvement).
Capital allowances
Capital allowances are items that can be described as plant, which do not form part of the premises. They are separately identifiable, not permeant and not part of the structure of the premises. A deduction for a depreciating asset can be claimed in line with effective life of the asset.
Examples:
Furniture
Curtains
Carpet
Appliances (e.g. Washing machine or fridge)
Capital works
Capital works are particular kinds of construction expenditure used to produce income. Capital works generally bring a deduction of 2.5% per year for 40 years following construction.
Examples:
Adding a fence
Extensions; such as patios or garages
Structural improvements such as a driveway
Major renovations to a room
Remember: Initial Repairs
Costs you incur to remedy defects, damage or deterioration that existed at the time you acquired the property are considered to be capital in nature. These may be classified as capital works or capital allowances, dependent on what the expenditure was for. It may be useful for you to obtain a report from a Quantity Surveyor which will provide you with the deprecation that is allowable for the building structure as well as capital allowances. If you are looking for a Quantity Surveyor, Peter Saddler & Associates has provided fantastic service to our clients for many years.
See below the ATO's quick reference chart, which can help you decide if your cost is either a repair, maintenance or capital improvements:
If you have any questions that relate specifically to your rental property, please get in touch with us on (07) 3285 2633.