Property Tax Tips: Maintenance, repairs and improvements. What can you claim?
If you own an
investment property, you’d probably be aware that you’re able to claim a number
of deductions for expenses such as repairs, maintenance and improvements. But
knowing what you can claim for and the type of work performed is sometimes a bit
unclear.
Firstly,
repair and maintenance expenses are usually deductible when they’re incurred.
However, improvements are not immediately deductible and will be instead
classified as a capital item (possibly subject to depreciation).
A repair
replaces or corrects something that is worn out or dilapidated. That ‘something’
must already exist in the property and to be considered a repair, it should only
be a partial fix and not a complete replacement. The aim of a repair is to restore
something to its original efficiency but not improve it. So, replacing a part in
a faulty dishwasher would be a repair, but replacing the dishwasher with a new
one would not be a repair but instead an improvement. Maintenance is simply work done to fix
existing deterioration or prevent deterioration.
As you would
gather therefore, an improvement makes something better than it was before,
rather than just bringing it back to its original state as a repair would. An
improvement will make something function more efficiently, be more valuable and
desirable, and probably add value to the property or improve its income
producing potential. Adding insulation to a property or installing a brand new
kitchen to replace the old one are both improvements to the property. With
improvements, they are considered a capital cost and as such you may be able to
claim depreciation calculated over a number of years, rather than immediately.
A common point
of confusion is initial repairs. If your property requires initial repairs after
purchase, they will usually be considered capital improvements if that repair
was required at the time you purchased the property. So, if you purchased a
property and there were a few missing floorboards that needed to be replaced and
broken windows to fix at the time of purchase, this is considered initial
repairs. The cost of bringing an
income producing property to a state where it is fit for tenants is considered a
part of the costs of acquisition and therefore a capital expenditure.
Additionally, it would still be considered an initial repair whether you were
aware or not of the problems at the time of purchase and also whether or not the
purchase price was adjusted to take this into account.
If you want to
ensure you can claim your repairs, then generally it is best to not conduct any
repair work for some time after purchase unless you really have to.
Momentum
Wealth and its affiliated entities are not Accountants or Financial Advisers.
While all information is provided in good faith, you should seek your own
independent advice in relation to taxation and
superannuation.
