Repairs

According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. This occurs when an asset is already damaged or deteriorated and therefore requires repairing.

Maintenance

Maintenance is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion

Any costs incurred to repair or maintain your investment property can be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out your capital gain or capital loss when you sell the property.

Capital improvements

A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation.

Capital works refers to the deductions available for the building's structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings. 

Getting it right when renovating

Being able to distinguish between the three types of deductions is especially important when it comes to renovating an investment property.

For example, you might decide to renovate the bathroom in your rental property. Retiling the bathroom would be deemed as a capital improvement and can be claimed as a capital works deduction. Residential homes in which construction commenced after 15th September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over forty years.

If you decide to replace a light fitting in the bathroom, this will be claimed as a plant and equipment asset and can be deducted based on the asset's effective life. If the purchase was less than $300 it will be 100 per cent tax deductible in the year the expense was incurred.

If you fix a crack in the plaster, this will be considered a repair as you are restoring a damaged asset. You're entitled to claim an immediate deduction for any expenses involved. 

Property investors completing renovations should also be aware of legislation introduced in 2017. The legislation stipulates that investors who purchased property after 7:30pm on the 9th of May 2017 are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits. 

If a property is considered to have been substantially renovated by the previous owner for selling purposes, then an investor can claim depreciation on the new plant and equipment assets along with any new or old qualifying capital works deductions available.

Given the complexities, investors considering renovations should contact a specialist quantity surveyor for advice before completing any work.

What can you claim when renovating? 

More and more Australian investors are choosing to renovate their investment properties before leasing them out. However, investors who live in the property while renovating risk missing out on thousands of dollars in property depreciation deductions.

Property depreciation is generally the second biggest tax deduction after interest, though it's often missed by investors. This is because it's a non-cash deduction, meaning you don't have to spend money to be eligible to claim it.

The Australian Taxation Office allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. Depreciation can be claimed for a building's structure via capital works deductions and for the plant and equipment assets contained within the property.

According to legislation introduced in 2017, investors are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits.

Move out first to claim maximum depreciation deductions

Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions after they move out of the property and it has been listed for rent. This will ensure they're eligible to claim the maximum depreciation deductions available.

It's important to note the 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective.

Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. These deductions typically make up 85-90 per cent of a total depreciation claim.

When removing structural assets there may be remaining depreciation deductions available. A process known as scrapping can often be applied, allowing investors to claim these deductions in the year the items are removed.

Article provided by BMT Tax Depreciation.

Do you have questions about how to claim rental property deductions?

Despite the 2017 rule changes, there are still lucrative tax deductions on offer for most investment properties. To discover what can be claimed for your investment property please email us or phone our friendly team on (02) 9899 3044.