One of the most common mistakes made by property investors when completing their annual tax return is confusing repairs, maintenance and improvements.
In this article, we will cover the following:
- Repairs vs maintenance
- What is a capital improvement?
- Examples
- How to claim the deductions correctly
It’s important to understand and distinguish each deduction in order to correctly lodge your claim and maximise your tax refund.
Key points:
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Repairs vs maintenance for rental property
According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence.
Maintenance is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion.
Any costs incurred to repair or maintain your investment property can typically be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out your capital gain or capital loss when you sell the property.
What is capital improvement?
A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation.
Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings.
Repairs, maintenance and capital improvement examples
Let’s take a look at an example of when you might need to distinguish between repairs, maintenance and capital improvements. You might decide to renovate the bathroom in your investment property.
Retiling the bathroom would be deemed as a capital improvement and can be claimed as a capital works deduction. Residential homes in which construction commenced after 15th September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over 40 years.
If you decide to replace a light fitting in the bathroom, this will be claimed as a plant and equipment asset and can be deducted based on the asset’s effective life. If the purchase was less than $300 it will be 100 per cent tax deductible in the year the expense was incurred.
If you fix a crack in the plaster, this will be considered a repair as you are restoring a damaged asset. You’re entitled to claim an immediate deduction for any expenses involved.
Property investors completing renovations should also be aware of legislation introduced in 2017. The legislation stipulates that investors who purchased property after 7:30pm on the 9th of May 2017 are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits.
If a property is considered to have been substantially renovated by the previous owner for selling purposes, then an investor can claim depreciation on the new plant and equipment assets along with any new or old qualifying capital works deductions available.
Claim your depreciation deductions correctly
The best way to ensure you claim your depreciation deductions correctly is to contact a specialist Quantity Surveyor to arrange a tax depreciation schedule.
A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property and is 100 per cent tax deductible. During FY2018/19, we found residential property investors an average first year deduction of almost $9,000. Find out more or request a tax depreciation schedule quote today.
I have an investment house where water leaks damaged toilets wooden foundation which needs to be demolish and rebuild. So all 3 toilets/bath rooms needs to be rebuilt with new foundation which costs around $40k. How is this expense treated as? Repair ?
Hi Mahesh,
This will depend on a few factors but based on the information you’ve provided it’s likely this would be claimed as a capital improvement and not a repair as the bathroom in its entirety has been replaced.
We recommend getting in contact with our team to discuss the finer details of your property to ensure the work is claimed correctly. We also recommend speaking with a trusted accountant.
Thanks,
BMT Team
Hi,
I have an investment property in Cairns built in the late 70’s that I am looking at replacing the roof on.
As part of the new roof install there will be some building code upgrades completed to the roofing structure to improve resilience to weather events.
There will also be improvements made to the roof line where a patio extension was poorly completed.
The roofing material will be changed fro custom orb to trim deck.
Would this be considered repairs and maintenance or capital improvment ?
Thanks.
Hi Wade,
This work would be classified as a capital improvement as the condition and value of the roof is being enhanced beyond its original state at the time of purchase. It can be claimed as a capital works (division 43) deduction.
Thanks,
BMT Team
Hi BMT Team,
I purchased an investment property in 2016 and had a depreciation schedule compiled by BMT. This year (2020), I have had to replace all the guttering (i.e. around the entire house), as it started to leak in many places. Would this be considered a repair and be immediately tax deductible? Or would it be capital in nature and depreciated (in which case, I would need to have it added to the depreciation schedule)?
Thanks!
Hi Mr Herd,
Thanks for your comment.
Given that you’ve replaced all the guttering, this would be classed as a capital improvement. Therefore, it is capital in nature and will need to be depreciated.
Our team can amend your tax depreciation schedule to ensure you can claim capital works deductions on your new guttering each financial year. You can contact our team on 1300 728 726.
Thanks,
The BMT Team
I had a leak coming into the house from one part of the roof on an investment property. I was just going to change the roof sheets where this leak was occurring, but once they lifted the roof sheets off, the roof substructure had to be partially rebuilt. Is the carpentry work done to fix part of the roof classed as a repair? Is the replacement of the roof sheets on the affected part of the house classed as a capital expense or a repair?
Thanks
Hi Lara,
Thanks for your comment.
It sounds as though this could be treated as repairs and maintenance.
Generally speaking, this is the case if you’re repairing or replacing like-for-like but the majority of the original structure and material type remains. If you’re replacing the existing roof sheets with a different, higher-grade material (going from old terracotta tiles to a new Colorbond roof) it would be a capital improvement.
If you’d like to call us on 1300 728 726 we can review your schedule, contact your accountant on your behalf and confirm.
Thanks,
The BMT Team
My tenant has advised that the window blinds in the bedroom have deteriorated and need to be replaced. They are beyond repair.
If I purchase for $300 or less will this be an immediate deduction?
Hi James,
Thanks for your comment.
If the blinds are purchased for less than $300, this will be an immediate deduction. However to be eligible, you must also make sure that the blinds are not part of a set or substantially identical to other items purchased for your property in the same financial year.
Thanks,
The BMT Team
Hi BMT team,
There was a leak inside the bathroom wall of my investment property. I got the plumber to fix the problem but the repair involved removing and replacing some things in the bathroom in order to fix the leak. In the invoice, it states the work completed as below:
– remove the complete shower area floor and walls
– fix up the water leak by replacing the plumbing water pipes in the wall
– new floor joist and flooring and fix up the walls
– new shower base
– new cement sheet on the wall
– water prof
– new standard wall tiles
– seal and grout
– new taps and shower head
– remove all the rubbish from site
I am not sure if I should claim the cost as a repair of damage or capital improvement? Could you please help?
Thanks.
Hi Kim,
Thanks for your comment.
Based on the information you have provided, it sounds like this could be classed as a capital improvement because the shower has been repaired beyond its original state.
If you’d like to call us on 1300 728 726 we can review your schedule, contact your accountant on your behalf and confirm.
Thanks,
The BMT Team
Hi BMT,
I have recently purchased an investment property that I will be intending to rent out. As part of the purchase, a building inspector that I engaged highlighted a few areas that we will need to repair such as a sagging ceiling in the garage, rusting metal roof and caulking/regrouting of bathrooms. From a tax perspective, is it better to do this before or after we have rented it out for tenants?
Thanks in advance.
Hi Ivan,
Thanks for your comment.
How tax is claimed is dependent on the level of the repair. For example, if you need to replace the entire garage ceiling, or replace all of the property’s roofing, these could be classed as capital improvements.
Capital improvements are claimed as capital works deductions over the lifetime of the property (forty years). Therefore, you can still claim capital works deductions even if the improvement was completed before the property was rented out.
For other repairs, they can only be claimed while the property is genuinely available for rent. Please get in touch with us on 1300 728 726 if you need any further information.
Thanks,
The BMT Team
Hi, I had to install Subterranean drainage and sump including an electric pump to the lower floor of my investment property due to a water course finding its way behind the Store room concrete block walls and pooling up.
The tenants moved out claiming the garage was uninhabitable, and these repairs had to be done prior to placing new tenants in the property.
What would this be classed as, repairs or improvements, and is it claimable in whole for that year or depreciated for future years?
Hi Peter,
Thanks for your comment.
Determining whether something is classed as a repair or improvement is determined on a case-by-case basis.
For example, while most of this installation could be classed as an improvement (e.g. the new electric pump), some of it could still be determined as a repair. The improvement portion must be claimed as depreciation over the applicable years, while a repair can be claimed in full in the same financial year.
We strongly recommend discussing this with your accountant as they can provide further advice.
Thanks,
The BMT Team
Hey what about repairing foundations On an investment property ie. piers etc . ..? Thanks
Hi Simon,
Thanks for your comment.
It would depend on the level of repair and foundation type. For example, if you just needed to fill in a few cracks in the piers then this could be classed as a repair.
We recommend getting in touch with your accountant as they can provide further advice on whether you can claim this as depreciation or as a repair.
Thanks,
The BMT Team
Hi,
I am about to move out of my owner occupier house and convert it to a rental property, it is currently advertised through our estate agents. The roof is leaking in a couple of spots and is rusted beyond repair so I am about to have the entire roof replaced, zincalume metal roof being replaced with a like for like (not exactly as the old roof sheets are no longer made). There one week between me moving out and the tenants moving in, which is the timing I’m looking at to replace the roof. My questions are, can I claim the replacement roof are repair and maintenance, and can i still claim it even though the first tenants haven’t yet moved in?
Thanks
Hi Mark,
Thanks for your comment.
If you are replacing the entire roof this may be classed as a capital improvement and will need to be depreciated. Additionally, as the property is yet to produce income you won’t be able to claim this as an expense. Your accountant can provide further advice on this.
Here’s a useful document if you’d like to read more about investment property repairs, maintenance and improvements https://www.ato.gov.au/uploadedFiles/Content/IND/Downloads/TaxTimeToolkit_Rental-repairs.pdf
Thanks,
The BMT Team
Hi
I am using the depreciation report every year for my investment property and would like to know
Instead of adding an additional capital improvement to the report to be depreciated can i claim the total cost of the additional improvement when i sell the property instead?
Hi Christine,
Thanks for your comment.
No, you can only claim capital works over 40 years under Division 43.
You can only claim this during the time you own the property when it was used as an investment. Any remaining amount passes onto the new owner to claim.
Thanks,
The BMT Team
To the BMT team – great service and I am still using your Tax Depreciation schedule for a rental property. Highly recommended.
I had an evaporative air-con unit catch on fire whilst the rental property was being rented out, and needed immediate replacement. The original system was part of the original capital works deduction and has been fully written down.
As I only had to replace part of the system (the evaporative unit) and this was installed onto the existing dropper and retained all the original ductwork, can this be treated as a repair.
Thanks,
David
Thank you, David! We are pleased to hear you are happy with your schedule.
Given that you have replaced the evaporative unit with a new one, it may need to be depreciated. The dropper and ductwork are claimed under capital works Division 43 as a separate component.
We recommend getting in touch with your accountant as they will be able to look at this more closely and provide further advice.
Thanks,
The BMT Team
Hi
I am using the depreciation report every year for my investment property and this year after tenants moved out we had to renovate entire unit before it was in good condition to be available for rent.
Main expenses were for paining walls, replacing carpets, replacing hot water boiler.
How do we claim for the expenses?
Hi Beata,
Thanks for your comment.
Separating repairs from improvements can be tricky and are always determined on a case-by-case basis.
For example, if you replaced the carpets with new, higher-valued carpet this may be classed as a plant and equipment improvement and can only be claimed using depreciation. The same applies for the new hot water boiler.
However, painting is a direct expense, and you can claim it in full this income year.
If you have any further questions, please contact us on 1300 728 726.
Thanks,
The BMT Team
Hello
I purchased an investment property 12 years ago. I was immediately advised the balcony was dangerous and needed to be rebuilt. I did this and now I have had to pull much of it up as the water proofing wasn’t sufficient, or the run off etc and it was leaking into common areas of the property. The tiles were destroyed pulling everything up again, so I understand replacing them would be capital but what about the actual repair works carried out for my place and the insurance premium I have to pay for the common property damage?
Thanks
Karen
Hi Karen,
Thanks for your comment.
Several factors play into how you can claim the repair works to your property and those to the common property.
For example, insurance claims can affect what depreciation you are entitled to. Your accountant will look at the repairs on a case-by-case basis to determine whether they can be claimed as an immediate expense, or by using depreciation deductions.
We hope this helps and please get in touch if you have any question regarding the depreciation of your property.
Thanks,
The BMT Team