Renovating Rentals: Repairs & Inprovements

Repairs & Improvements: FAQ's

The following is an exerpt of the ATO's view.

"The property was a great price.

You did the calculations, and it had all the hallmarks of a good rental investment. Plus it has a great long-term tenant.

All it needs is a few repairs and a couple of improvements, and the return will exceed your expectations – and that’s without taking into account the tax deductions you can claim for ‘repairs’.

So what is a deductible repair? Isn’t updating a worn-out kitchen or replacing the threadbare carpet a deductible ‘repair’ to the property? After all, you want to keep your tenant happy.
To make sure you get the best from your investment you need to know how the Tax Office defines deductible repairs before you start ripping up the carpet and pulling out the kitchen cupboards.

A repair is usually occasional and partial. Repairs typically replace a part of something or restore something to its original working order.

If you need to replace something entirely, like a complete set of kitchen cupboards, this suggests that it is not a repair. This is often a capital expense that is not immediately deductible, but which may have a deduction spread over more than one year, such as a decline in value deduction over the life of the asset, or a capital works deduction spread over 40 years.

However, a repair can include the rectification of damage or ageing to a part of a rental property, to restore that part to its former functionality. For example, a repair includes the fixing a window that has been broken, or restoring an air conditioning unit to proper functioning where parts have worn out or deteriorated and have to be replaced.

While a repair simply restores something to its original state, an improvement makes something better than it was originally. It can involve bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do e.g. remodelling kitchens or bathrooms, or extending the size of a house.

Some activities which are often mistaken for deductible repairs include:
a insulating a property
a repainting a house that had defective paintwork at the time it was acquired
a replacement of an entire structure or unit of property, like a complete fence or shed, a stove, or worn out kitchen cupboards.

Example:
William purchases a house that was ostensibly in good repair. To make it more attractive to prospective tenants, minor repairs and renovations are undertaken. The minor repairs and renovations are not deductible as repairs. During the course of these repairs and renovations, William discovers that the woodwork is seriously affected by the ravages of white ants. The expenditure incurred in these circumstances to fix the white ant problem existing at the date of purchase is also of a capital nature. Two years after purchase, William decides the wooden floor needs repairing. The options are either to repair the old floor or to replace it with an entirely new one of steel and concrete. William decides to adopt the second option because it will save future repairs and because it has distinct advantages over the old wooden floor. By choosing the second option, William cannot claim a deduction for a repair as he could had he simply repaired the wooden floor. It is an improvement."

For more information on taxation and investment property calculators visit our site here:
Rental Property Repairs.

By D Maynard
CEO My Tax Zone