Repairs and maintenance for a rental property: Repair, replace or improve?

The amount spent does not determine which category applies. A relatively inexpensive job can still be capital in nature, while a more substantial expense may qualify as a repair. What matters is the nature of the work completed.

Invoices, photographs, site inspections and records of the work completed can help establish what was repaired, replaced or improved.

Let’s consider an air conditioner that stops working. If a technician replaces a faulty component but the existing unit remains in place, the work has restored the asset to working condition rather than replaced it.

This principle can apply throughout a rental property. Patching a damaged section of flooring, repairing part of a fence or replacing individual damaged roof tiles may qualify as repairs where the work restores the affected area.

Eligible repairs relating to damage or deterioration arising while a property is rented or genuinely available for rent can generally be claimed as an immediate deduction.

Maintenance can also be immediately deductible in appropriate circumstances and generally involves work undertaken to prevent deterioration.

However, the description on an invoice does not determine the tax treatment. Calling work, a ‘repair’ does not necessarily make it immediately deductible.

Initial repairs are different

When the damage occurred also matters.

Work undertaken to remedy defects, damage or deterioration that existed when an investment property was purchased is generally considered an initial repair. These costs are capital in nature and are not generally immediately deductible.

For example, if an investor buys a property with an already damaged door, repairing the door after settlement does not necessarily make the cost immediately deductible simply because the property is now being used to produce rental income.

This makes it important to distinguish between pre-existing problems and deterioration that occurs while the investor owns and rents the property.

Now consider the same air conditioner.

If the air conditioner was instead removed and a new unit installed, the new asset would instead be treated as plant and equipment and depreciated over time.

This is where property depreciation becomes relevant.

Property depreciation falls into two categories: plant and equipment and capital works. Plant and equipment include easily removable or mechanical assets such as air conditioners, hot water systems, carpet and appliances. If eligible, an investor can claim plant and equipment deductions over the asset’s effective depreciable life as set by the Australian Taxation Office.

Meanwhile, capital works relates to qualifying structural or permanently fixed elements such as walls, roofing, and built-in cabinetry and can generally be claimed at 2.5 per cent per year for up to forty years.

Kitchen works provide a useful example of the difference between repairing and improving a property.

Repairing damaged hinges, doors or sections of existing cabinetry may qualify as a repair where the work restores what is already there.

If the kitchen is instead removed and new fixed cabinetry is installed, the work creates new capital works rather than simply repairing the existing kitchen.

A renovation may also contain new plant and equipment such as dishwashers and stovetops. This is why individual components of a renovation need to be considered separately.

A single renovation project can include repairs, replacement assets and capital improvements. Consider an investor updating a rental property between tenants. The work includes repairing damaged plaster, installing new carpet, replacing the air conditioner and renovating the kitchen.

Those costs should not necessarily receive the same tax treatment.

The plaster repair may be immediately deductible. The carpet and air conditioner may be plant and equipment. The fixed components of the new kitchen may qualify as capital works.

Itemised invoices and clear records can help identify the different components. A tax depreciation schedule can provide property-specific information about eligible plant and equipment and capital works.

Detailed records are important when several types of work are completed at once. Where possible, invoices should separately identify repairs, replacement assets and structural works rather than combining everything under broad descriptions such as ‘property repairs’ or ‘renovation’.

Before replacement or renovation works begin, a tax depreciation schedule can also help identify eligible assets that may have remaining depreciation deductions. Where eligible assets are removed, any residual depreciable value may be available as an immediate deduction. This is commonly referred to as scrapping.

Your accountant can confirm the deductions that apply to your circumstances.

Whether work is a replacement, improvement, repair or maintenance for a rental property, depends on what was done, not simply what the expense was called.

Repairs may be immediately deductible, while replacement assets may need to be depreciated as plant and equipment and improvements may form part of capital works. A single renovation can also include more than one of these treatments.

For investors, the practical step is to keep clear, itemised records of the work completed and the assets installed or removed. Where replacement or renovation works are planned, identifying depreciable assets before work begins can also help determine whether remaining deductions may be available.

A comprehensive tax depreciation schedule prepared by a specialist quantity surveyor, such as BMT Tax Depreciation, can ensure eligible plant and equipment and capital works are identified and correctly classified. For investors spending money on a rental property, complete records and correct classification is essential to claiming the deductions available correctly.

To correctly identify the depreciation deductions available from renovations, replacements and other capital expenditure for your investment property, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote online.