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Are repairs to investment property tax deductible?

Last year more than a million property investors claimed billions of dollars in rental deductions.

Quite staggering, isn’t it. No wonder the Australian Taxation Office (ATO) seems to target property investors every year!

For as long as I can remember, around June, the ATO released a statement warning property investors to be careful about what they claim.

Repairs Investment property tax deduction

And every year, they warn that if you are claiming repairs and maintenance to your property, make sure they are legitimate and not the capital works allowance.

There is a good reason why the ATO focuses on this topic. In my opinion, it’s quite a grey area – and according to the investors we speak to – filled with confusion.

Part of the reason is that “repair” is not defined within the tax laws legislation.

Therefore, it takes its ordinary meaning, “the restoration of a thing to a condition it formerly had without changing its character”. (W Thomas & Co v.FC of T (1965) 115 CLR 58).

It is confusing whether repairs to investment property are tax-deductible, and sometimes it’s best to contact us and speak to an expert.

Tax ruling TR 97 /23 is the Bible for defining what constitutes a repair and what doesn’t.

It’s pretty long and complex… so I’ll summarise what questions you need to ask yourself before you claim the work as an outright deduction or not. If not, you will need to organise a Tax Depreciation Schedule.

There are four basic tests that need to be satisfied before you can claim work as an outright deduction:

  1. The work you do needs to relate to the wear and tear of the property whilst it was an income tax producing asset for you.
  2. Repairs carried out when you initially buy a property are defined as “initial repairs” and cannot be claimed as an outright deduction.
  3. If you replace the whole item – it is not a repair.
  4. If you improve the material when carrying out the work – it is considered a capital improvement, not a repair, and is to be depreciated.

It may be best to get a tax depreciation schedule quote for your property, and we can discuss the best way moving forward to include this deduction in your tax return to maximise your tax refund.

The best way to highlight whether repairs to investment rental property are tax-deductible is through a series of examples:

Repairs tax deductible or not example 1

Jack and Jill buy a run down 1930’s weatherboard property that needs some work carried out in order to bring the property to a rentable state. Five cracked roof tiles have caused leakage that’s damaged the carpet in one of the bedrooms. They immediately replace the carpet & replace the cracked tiles. They also get the plumber out to fix the faulty hot water heater.

This work sounds like repairs in nature – but unfortunately, it is not because the “damage or deterioration” was done before you acquired the property.

The ATO has defined this as “initial repairs”, and these costs are considered capital expenses and depreciated over time.

Repairs tax deductible or not example 2

Jack and Jill buy a run down 1930’s weatherboard property that’s already housing a tenant. The tenant remains in the property for 9 months then moves out. With the tenant gone, the owners discover 5 cracked roof tiles that caused the roof to leak and damage the carpet in the bedroom. They immediately replace the carpet & cracked tiles. They also get the plumber out to fix the faulty hot water heater.

Guess what? This is the same work… and in this case, Jack and Jill can claim the work as an outright deduction. That’s because they believe the damage was caused after buying the property.

Repairs tax deductible or not example 3

Jack and Jill buy a run down 1930’s weatherboard property with a tenant. The tenant moves out after 9 months. With the tenant gone, the owners discover 5 cracked roof tiles that caused the roof to leak which led to carpet damage in the bedroom. They immediately replace all the carpet & the whole roof. They also get the plumber to replace the faulty hot water heater.

In this case, Jack and Jill decide to replace the whole item. The work they carried out will need to be depreciated at 2.5% per annum over 40 years and not claimed as an outright deduction. Even though the roof was leaking, the water heater needed to be fixed and the carpet was water damaged!

In this example, if Jack and Jill had only repaired the water heater – a mixture of outright deductions and depreciable items is allowed as long as they are separated.

Repairs tax deductible or not example 4

Jack and Jill own a 1930s weatherboard property for several years before deciding to fix the dilapidated fence. The old fence was made out of timber palings. Cash-strapped, Jack and Jill decide to fix the front fence only, leaving the rear and sides alone. They decided a nice new brick fence would be more suitable and will add value to the property.

In this example, although Jack and Jill owned the property for a while & only fixed part of the problem, they can still only claim this work over 40 years. They can’t claim the work outright because the material they used improves the existing product or an upgrade.

In summary, this is quite a complex area and there are many other scenarios I could run through to confuse you!!

It’s an area that’s always targeted by the ATO – because, even though logically the work you are doing would seem to be a repair, unfortunately, in the eyes of the ATO, it might be of a capital nature.

So, if you think you can buy an old property, renovate it straight away and get a massive deduction in one hit, think again.

All these repairs can be claimed against your taxable income… some just quicker than others.

Remember, if you can’t claim an outright deduction for work carried out, you can probably claim the tax benefits of depreciation by clicking here and getting a depreciation schedule quote.

Start the claim this financial year.