Over the course of owning an investment property, you will likely be required to pay for repairs. Luckily, being a property investor gives you access to a series of tax benefits that can alleviate many of the costs you are likely to face.
Repairs made to your investment property are tax deductible, however many investors may confuse repairs with improvements.
In this article, we’ll explain the difference between repairs and improvements, and what you need to know about how repairs affect your tax.
Tax claims on property repairs are treated differently to tax claims for improvements. It’s important to know the difference between the two to avoid complicating your annual tax procedures.
By repairing something, you are restoring it to its original state or purpose. A common example of a repair could involve deep cleaning stained carpets. Repairs are a tax deduction, provided that you meet the criteria.
Essentially, for the ATO to consider the work a repair, you have to return the damaged feature to the state it was in prior to being damaged. For example, if you went to repair a broken window, you’d have to use the same kind of glass and materials that were used before it was damaged.
If you were to replace the damaged window with double glazed glass, instead of the original single glazed glass, this would be considered an improvement.
The same would apply if you replace a damaged appliance with a new one. Usually, if you replace an item in your property, this isn’t considered a repair, but you may be able to claim a capital works deduction or depreciation in the future.
Improvements made to your investment property are handled differently. An improvement is a change you make to your property that increases its value and/or desirability. When you entirely change the nature of the feature that is being worked on, this is also considered an improvement (e.g. repairing an item using more luxurious materials than the original).
An example of an improvement could be replacing your damaged washing machine with a new, energy-efficient model. You won’t be able to make tax claims for the total cost of improvements at the time that you make them, however there are still ways to reduce your tax long-term.
You will eventually be entitled to claim for depreciation of the wear and tear of features in your investment property. Plus, you can claim capital works deductions over the years for the costs of major renovations.
Read more about repairs vs improvements here.
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To be clear, maintenance is not the same thing as repairing. Maintenance includes work carried out in an attempt to prevent damage in the future and keep the property in a satisfactory condition. This could involve routine plumbing work and garden maintenance. Examples of maintenance work could include:
Maintenance is usually tax deductible and can be claimed at Repair and Maintenance on your rental schedule.
If you make any repairs to damage that existed when you purchased the property, this is considered an initial repair and won’t be an immediate deduction. You can claim initial repairs as Capital Works or Capital Allowances on the rental schedule.
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The ATO has a tendency to closely scrutinise tax deductions made for rental investment properties. When making tax claims, you’ll need to provide a lot of detailed documentation.
So, you’ll need to keep and provide records relating to:
Organising your taxes for a rental property can be overwhelming. It may be worthwhile seeking help from an accountant, specifically one with experience in rental property tax and depreciation.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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