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  • Rental properties – damaged or destroyed property

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    Types of income

    Insurance payouts

    Insurance payouts for loss of rental income and repairs need to be included in your income.

    Disaster assistance payments

    Most one-off assistance payments you receive from the government, charities or community groups are tax-free. You need to check the types of payments and how they affect your tax.

    Replacing depreciable assets

    If the insurance payout you receive for your depreciating asset is more than its written down value, you need to include the balance as income. If the payout is less, you can claim a deduction for the difference.

    Expenses

    If you use an assistance payment or money from a relief fund to buy items for your rental property, the normal conditions for deductibility apply.

    Capital works

    If you replace an entire structure that was fully or partially damaged or destroyed, it's likely to be classed as capital works. For example, replacing all the fence, not just the damaged portion or replacing all kitchen cupboards. This may result in a capital gain or loss. See Involuntary disposal. New assets are generally deductible at 2.5% over 40 years.

    Repairs

    If you fix something that is damaged or broken, it's likely to be classed as a repair. For example, fixing a leaking tap, or part of the fence damaged in the storm. Amounts for repairs and maintenance are claimed fully in the year the expense is paid.

    Depreciating asset

    If you install a brand new appliance or floor or window coverings, it's likely to be classed as a depreciating asset. For example, buying a new dishwasher or installing new carpet. If claiming the original item as a capital allowance, claim a deduction for the remaining balance (adjustable value) less any compensation received for the total loss of the asset. You claim a deduction over the effective life of the replacement asset (decline in value).

    Go to Rental properties repairs, maintenance and capital expenditure for more information.

    If your rental property can't be lived in

    If your property is unable to be lived in and no longer earning rental income, you can claim a deduction for costs incurred while doing repairs or renovations. For example, council rates or interest charged on your mortgage. You can't claim a deduction for your own labour.

    To be entitled to claim expenses while making repairs or renovations, the work needs to be completed in a reasonable timeframe and the property must have been rented or available for rent immediately before it was damaged or destroyed.

    If the property is demolished and you're holding vacant land because of the damage, you can claim a deduction for holding costs (for example, land taxes and council rates) if the exceptional circumstances exemption applies.

    There is a limit of 3 years from the date of the exceptional circumstances to continue to claim deductions using this exemption.

    Capital gains tax (CGT) implications for damaged or destroyed assets

    If you receive an insurance payout, it may need to be considered when calculating your capital gain or loss. A capital gain arises if the insurance payout is more than the asset's cost base if the insurance payout is less than the reduced cost base you have a capital loss.

    You choose to rebuild or replace your rental property

    You may be entitled to roll over any capital gain you make and delay paying the gain until later. To defer the gain, you must incur expenditure within one year after the end of the income year the property was destroyed. For more information, see Involuntary disposal.

    You choose not to rebuild your rental property

    You need to calculate your capital gain or loss.

    Any insurance payout you receive must be counted as capital proceeds when calculating your gain or loss.

    If you don’t receive an insurance payout there are no capital gains tax consequences until the property is sold. The CGT event occurs when the property is sold at a future date.

    Main residence exemption

    If the property was previously your main residence, you can treat it as your main residence for up to 6 years after you move out, even if the property is destroyed. Your main residence is exempt from CGT, but you generally only have one main residence at a time and can't treat any other property as your main residence for the same period.

    Important things to remember

    Timing of a CGT event

    If your CGT asset is lost or destroyed, a CGT event happens on the date you receive compensation for the loss or destruction.

    If you don’t receive any compensation, the CGT event happens when the loss is discovered or the destruction occurred.

    Get record keeping right

    Keep records of every transaction including insurance payout documents, receipts for any new purchases or repairs. If you borrow, keep all loan documents and statements.

    Note: Before and after photos of destroyed assets may be helpful but they aren't sufficient records on their own.

    Example: deduction for repairs while property was unoccupied

    Ben's rental property was tenanted when it was severely damaged by a cyclone. Due to the damage, the tenants had to move out. Ben carried out repairs in a reasonable time and then advertised the property for rent.

    Even though the property wasn't available for rent while being repaired, he is able to claim for the repairs because it was rented immediately before the damage occurred.

    End of example

     

    Example: deduction for replacement of depreciable items

    Josh's rental property was covered in smoke and ash from bushfires. He had the home thoroughly cleaned and had to replace all carpets and curtains. Josh can claim a deduction for the:

    • cleaning
    • remaining value of the pre-existing carpet and curtains
    • decline in value of the new carpet and curtains.

    If Josh decided to repair the damaged carpet and curtains instead of replacing them, he would claim the immediate deduction as a repair.

    End of example

     

    Example: no capital works deduction

    Zahli owns a rental property that was damaged in a severe hailstorm. Because of this, her insurance company replaced the entire roof.

    Zahli can't claim a capital works deduction for the new roof that was carried out by the insurer.

    End of example

    Return to Information for investors including deductions you can claim

      Last modified: 20 Jun 2022QC 59553