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Expenditure for repairs you make to the property may be deductible. However, the repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property.
Repairs generally involve a replacement or renewal of a worn out or broken part -for example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.
However, the following expenses are capital, or of a capital nature, and are not deductible:
- replacement of an entire structure or unit of property (such as a complete fence or building, a stove or refrigerator)
- improvements, renovations, extensions and alterations
- initial repairs –for example, in remedying defects, damage or deterioration that existed at the date you acquired the property.
You may be able to claim capital works deductions for these expenses -for more information, read the section Capital works deductions (formerly special building write-off). Expenses of a capital nature may form part of the cost base of the property for capital gains tax purposes (see the publication Guide to capital gains tax) – but not generally to the extent that capital works deductions have been or can be claimed for them (see Deductions affecting CGT cost base calculations).
Example: Repairs prior to renting out the property
The Hitchmans needed to do some repairs to their newly acquired rental property before the first tenants moved in. They paid an interior decorator to re-paint dirty walls, replace broken light fittings and repair doors on two bedrooms. They also discovered white ants in some of the floor boards. This required white ant treatment and replacement of some of the boards.
These expenses were incurred to make the property suitable for rental and did not arise from the Hitchmans' use of the property to generate assessable rental income. The expenses are capital in nature and the Hitchmans are not able to claim a deduction for these expenses.
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Repairs to a rental property will generally be deductible if:
- the property continues to be rented on an ongoing basis
- the property remains available for rental but there is a short period when the property is unoccupied -for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.
If you no longer rent the property, the cost of repairs may still be deductible provided:
- the need for the repairs is related to the period in which the property was used by you to produce income, and
- the property was income-producing during the income year in which you incurred the cost of repairs.
Example: Repairs when the property is no longer rented out
After the last tenants moved out in September 2002, the Hitchmans discovered that the stove didn't work, kitchen tiles were cracked, and the toilet window was broken. They also discovered a hole in a bedroom wall that had been covered with a poster. In October 2002 the Hitchmans paid for this damage to be repaired so they could sell the property.
As the tenants were no longer in the property, the Hitchmans were not using the property to produce assessable income. However, they could still claim a deduction for repairs to the property because the repairs related to the period when their tenants were living in the property and the repairs were completed before the end of the income year in which the property ceased to be used to produce income.
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Examples of repairs for which you can claim deductions are:
- replacing broken windows
- maintaining plumbing
- repairing electrical appliances.
Examples of improvements for which you cannot claim deductions are:
- insulating the house
- adding on another room.
For more information, see the publications Guide to capital gains tax and Taxation Ruling TR 97/23 Income tax: deductions for repairs. See also Capital gains tax in this publication.
Last modified: 04 Dec 2005QC 27452