Property tax tips: repair or improvement? Getting it wrong could cost you
It’s one of the most common traps property investors fall into when it comes to tax time: incorrectly claiming property improvements as repairs rather than as a capital cost. So when conducting work on a rental property, how do you know what you can claim as a tax deduction and what you can’t?
Expenses that relate to repairs and maintenance of a rental property will usually be deductible when they are incurred, but any work that is considered an improvement, such as installing a new kitchen, will not be deductible and instead deemed to be a capital item that may be subject to depreciation.
There are a few important points to consider:
- A repair is the replacement or renewal of a worn out or dilapidated part of something, but not the entirety. For example, if some part of the carpet needs to be replaced that would be a repair, but if you replaced the entire carpet throughout the house, that would be an improvement and not immediately deductible (but may be depreciable).
- An item of expenditure is considered to be a repair when it brings something back to its operational efficiency, but does not significantly improve it. For example, a few light fittings may need replacing. Normally this would be considered a repair, but if you put in expensive chandeliers, it would be considered an improvement and not a repair.
- Initial repairs after you buy a property will often be considered capital improvements. The courts consider that these repairs would have been factored into the purchase price and therefore are considered capital in nature.
Generally it is wise not to conduct any repair work for some time after you purchase an investment property, unless it is of course necessary for safety issues. There is no fixed time specified by the law, but if you were to claim a large amount of repairs in your tax return the first year you purchased a property, it could certainly arouse the interest of the Australian Taxation Office.
Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.