Are repairs to your 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) targets property investors yearly!
Since I can recall, usually around June, the ATO issues a statement advising property investors to be cautious with their claims.
Every year, they caution property owners to ensure that claimed repairs and maintenance are legitimate and not confused with capital works allowance.
The ATO focuses on this topic for a good reason. If I were to say, it’s a grey area – and according to the investors we speak to – filled with confusion.
Part of the reason is the lack of definition for “repair” 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).
Whether repairs to investment property are tax-deductible is confusing, and sometimes it’s best to contact us and speak to an expert. To calculate your estimated tax deduction savings on your investment property you can use our FREE depreciation calculator here:
When can you claim depreciation on a renovated property?
Tax ruling TR 97 /23 is the Bible for defining what constitutes a repair and what doesn’t.
Because of the complexity, here are 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 by leaving your contact details here:
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When can I claim work as an outright deduction?
In order to claim any deductions, four basic tests need to be satisfied before you can claim, which are:
- The work you do has to relate to the wear and tear of the property whilst it was an income tax-producing asset for you.
- Repairs carried out when you initially buy a property are defined as “initial repairs” and cannot be claimed as an outright deduction.
- If you replace the whole item – it is not a repair.
- 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
Dave and Jane buy a run down 1930’s weatherboard property that needs some work carried out if they want it to be able to rent the property. 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 arrange for a plumber to repair 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 and when it was in its original state.
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
Amira and Ahmed 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 arrange for a plumber to repair the faulty hot water heater.
Guess what? This is the same work… and in this case, Amira and Ahmed can claim the work as an outright deduction. That’s because they suspect the damage occurred after purchasing the property.
Repairs tax-deductible or not, example 3
Saurabh and Anna 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, Saurabh and Anna 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. Despite the leaking roof, the water heater required fixing, and the carpet suffered water damage!
In this example, if Saurabh and Anna 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
Dave and Jane own a 1930s weatherboard property for several years before deciding to fix the run-down fence. The old fence was constructed from timber palings. Cash-strapped, Dave and Jane 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 Dave and Jane 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 short this is quite complex, and there are many other scenarios I could run through to confuse you!!
The ATO always targets this area. Although the work may seem like repairs, the ATO may consider it capital in nature.
Renovating an old property immediately after purchase to claim a substantial deduction all at once is a stretch.
You can claim all these repairs against your taxable income…some just more quickly than others.
Should the work not qualify for an immediate deduction, request a depreciation schedule quote to explore potential tax benefits.
Kick off the claim this financial year.