Investment property deductions, the difference between a repair and an improvement

This is a common misconception for my clients who own investment properties and have incurred expenses for their properties.

You can claim repair and maintenance expenses in the income year you incur them.

However, you cannot claim expenses as repairs and maintenance which are capital or of a capital nature. For example, replacement of an entire structure such as a fence or initial repairs such as defects that existed at the date you acquired the property.

Repairs

Repairs means working to make good or remedy defects in, damage to or deterioration of the property. Generally, repairs must relate directly to wear and tear or other damage that occurred as a result of renting out the property.

Examples of repairs include:

• Replacing broken windows

• Replacing part of the gutter damaged in a storm

• Replacing part of a fence damaged by a falling tree branch

• Repairing electrical appliances or machinery.

If you no longer rent the property, you may still be able to claim repair expenses where:

• The need for repairs relates to a period where the property was income producing

• The property was income producing during the income year you incur the expenses.

Maintenance

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

Examples of maintenance include:

• Repainting faded or damaged interior walls of a rental property

• Oiling, brushing or cleaning something that is otherwise in good working condition – for example, oiling a deck or cleaning a swimming pool

• Maintaining plumbing.

Improvements

You cannot claim a deduction for the total cost of improvements to your rental property in the year you incur them.

An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out.

Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions.

Improvement means work that:

• Provides something new

• Generally furthers the income-producing ability or expected life of the property

• Goes beyond just restoring the efficient functioning of the property.

Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciating asset, these claims are claimed as a deduction to you over a number of years in your tax return.