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  • Rental properties – repairs, maintenance and capital expenditure

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    Quick reference guide

    Repair

    If you replace something that is worn out, damaged or broken because of renting out the property, it's likely to be a repair. For example, replacing part of a fence damaged in a storm or getting in a plumber to fix a leaking tap. This should be claimed at Repair and Maintenance on the rental schedule.

    Maintenance

    If you do work to prevent deterioration or fix existing deterioration to keep the property in a tenantable condition, it's likely to be maintenance. For example, getting faded interior walls repainted or having a deck re-oiled. This should be claimed at Repair and Maintenance on the rental schedule.

    Initial repair

    If you repair damage that existed when the property was bought (whether it was known about at the time of purchase or not), it's likely to be an initial repair. For example, fixing floorboards or repairing deteriorated window frames and the damage existed when the property was bought. This should be claimed in your cost base at Capital Works or Capital Allowances on the rental schedule.

    Capital works

    If you replace an entire structure that is partly damaged or renovate or add a new structure to the property, it's likely to be capital works. For example, replacing all the fencing, not just the damaged portion, or adding a carport. This should be claimed at Capital Works on the rental schedule.

    Depreciating asset

    If you install a new appliance or floor or window covering, it's likely to be a depreciating asset. For example, buying a new dishwasher or installing new carpet. This should be claimed at Capital Allowance on the rental schedule.

    Repairs and maintenance

    The cost of repairs and maintenance may be deductible in full in the year you incur them if both:

    • the expense directly relates to wear and tear or other damage that occurred while renting out the property
    • the property either  
      • continues to be rented on an ongoing basis
      • remains available for rent, but there's a short time when the property is unoccupied (for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants).
       
    Repairs

    Generally, repairs must relate directly to wear and tear or other damage that occurred while renting out the property.

    Examples of repairs include:

    • replacing broken windows
    • repairing electrical appliances or machinery
    • replacing part of the guttering damaged in a storm
    • replacing part of a fence damaged by a falling tree branch.
    Maintenance

    Maintenance generally involves keeping your property in a tenantable condition. It includes work to prevent deterioration or to fix existing deterioration.

    Examples of maintenance include:

    • repainting faded or damaged interior walls
    • oiling, brushing or cleaning something that is otherwise in good working condition (for example, oiling a deck or cleaning a swimming pool)
    • maintaining plumbing.

    Capital expenditure that may be claimable over time

    Capital allowances

    Depreciable assets are items that can be described as plant, which don't form part of the premises. These items are usually:

    • separately identifiable
    • not likely to be permanent and expected to be replaced within a relatively short period
    • not part of the structure.

    When claiming a deduction for decline in value for each asset, you can choose to use either:

    • the effective life the Commissioner has determined for these types of assets
    • your own reasonable estimate of its effective life.

    Where you estimate an asset's effective life, you must keep records to show how you worked it out.

    Examples of assets that deductions for decline in value can be applied to include:

    • floating timber flooring
    • carpets
    • curtains
    • appliances like a washing machine or fridge
    • furniture.
    Capital works

    Capital works describes certain kinds of construction expenditure used to produce income.

    The rate of deduction for these expenses is generally 2.5% per year for 40 years following construction.

    Capital works include:

    • building construction costs
    • the cost of altering a building
    • major renovations to a room
    • adding a fence
    • building extensions such as garages or patios
    • adding structural improvements like a driveway or retaining wall.

    Improvements

    An improvement can be anything that makes the property better, more valuable or more desirable, or changes the character of the item the works are being carried out.

    Improvements include work that:

    • provides something new – for example, adding a gazebo or carport
    • generally improves the income-producing ability or expected life of the property
    • goes beyond restoring the efficient functioning of the property.

    Improvements can be either capital works, where it's a structural improvement or capital allowances where the item is a depreciable asset. It's important to correctly categorise each expense incurred to ensure it's treated correctly for tax purposes.

    Initial repairs

    Costs you incur to remedy defects, damage or deterioration that existed at the time you acquired the property are capital in nature. These costs may form part of the cost base of property for capital gains tax purposes (but not generally to the extent that capital works or capital allowance deductions have been or can be claimed for them). The costs to make a property suitable to be rented out are capital in nature and not immediately deductible. To be deductible, the necessity for repairs must have been caused by the rental activity of the person making the claim, not from a previous owner.

    However, if your new property was rented or made available for rent and has been affected by special circumstances beyond your control, such as a natural disaster or deliberate damage by tenants, you can claim a deduction of the cost of repairs incurred to restore the property to its original condition.

    Example: initial repairs not deductible (existing damage)

    Lisa buys a property with the intention of renting it out. At the time of purchase Lisa knew that she would need to repair the roof (replace all roof tiles) and part of the ceiling as they were in a poor condition.

    When carrying out the works, Lisa discovered there was extra structural damage that required her immediate attention. The repair to the ceiling costs her $2,000, the replacement of roof tiles cost her $9,000 and the structural work cost her a total of $15,000.

    The 'initial' repair of the ceiling of $2,000 isn't deductible, but it may form part of her cost base for CGT purposes, the replacement of the entire roof and the structural work can be claimed as capital works expenses.

    End of example

     

    Example: repairs cost (special circumstances beyond your control)

    Dimitri buys a property with the intention to rent. Unexpectedly, after 10 weeks being available for rent, a heavy storm damaged the entire roof and minor parts of the ceiling.

    As the property was genuinely available for rent before the storm and the expenses were done to restore the property to its original condition, Dimitri will be able to claim repairs cost for the ceiling and capital works deduction for replacing the roof with a more storm resistant roof.

    End of example

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      Last modified: 20 Jun 2022QC 59553