When it comes to claiming tax deductions for rental properties, it is essential to distinguish between repair and maintenance work and capital improvement as they have very different tax consequences.
Repair & Maintenance Work
A repair is the rectification of defects or damage to the property. It usually has the following characters:
It is required because there is a damage to the property
It replaces a broken part of something on the property, but not the entirety
It doesn’t enhance the efficiency or function of the property
It is important to distinguish between work done to only the damage part of something, or the entirety of it, as replacement of only the damaged part is still a repair, such as:
Repair blocked sewage and installation of new pipes (not the entire sewage system of the property)
Replacement of wooden stumps which were damaged in flood (the stumps being part of the property structure)
Replacement of water damaged bathroom vanity with similar material and function (while sewage system underneath is not replaced)
Similar to repair, maintenance is the work that prevents damage to the property or maintain it to its current condition. Common examples include cleaning and painting.
Both repair and maintenance expenses can be claimed as a tax deduction in the year they incur.
Initial Repair
Initial repair is work done at the time of purchasing the property to bring it to a condition that is suitable to be rented out. Although repair and maintenance in nature, these initial repairs are not qualified for outright deductions. Depending on what it is, initial repair may be included as part of cost base of the property, or depreciated under Division 43 – special building write-off.
Improvement and Replacement
In contrast to repair, an improvement work usually has the following characters:
Improve the efficiency or the function of the property
Potentially increase life or market value of the property
What is improved is a major or important part of the property
Replace an entirety part of the property with something new
Common improvement and replacement include:
Replace the whole cupboard in the kitchen with a new one
Purchase a new hot water system
Replace the worn out wooden gate with a new electronic gate
Get the garden re landscaped including new irrigation system
Improvement and replacement are deducted over years through depreciation. Improvement work that involves alteration or extension to the structure of the property is depreciated under the special building write-off rules.
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