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Rental Property Tax Deductions

If you’re planning on investing in a rental property you need to know how it is going to affect your tax return. It is widely known that, if a brand-new rental property is acquired to be used to derive assessable rental income, the construction costs are not immediately deductible but are instead capitalised and claimed over several years.

While that appears to be relatively well understood by taxpayers in general, there seems to be some confusion surrounding the costs of renovating an existing rental property as well as the deductibility around repairs and maintenance due to tenant occupancy vs repairs and maintenance required when the property was initially purchased.

Renovating Your Rental Property

More and more property owners are renovating their rental properties to either attract better quality tenants or, to improve the overall value of their investments. Because of this increasing trend, the ATO have expressed their concerns about the lack of understanding concerning the correct tax treatment of these types of expenses.

The difficulty with determining the tax treatment of renovation costs is that there are often a lot of different types of expenses involved and, unfortunately, there is no ‘broad strokes’ approach to dealing with them.

Each expense will need to be considered individually to determine the nature of what the expense is so it can be treated appropriately for tax purposes.

To make things even more challenging, the distinction between ‘repairs and maintenance’ vs ‘capital improvements’ is not always clear cut. However, there are substantial differences in their respective tax treatments.

Distinguishing Between Repairs and Improvements

Repairs on a rental property that is used to produce assessable income are deductible. A ‘Repair’ refers to the process of remedying defects in the property, damage to the property and deterioration of the property.

Consideration is given to whether the work restores the efficiency of the function of the property without changing its character, rather than the appearance, form, state or condition.

If work results in the replacement, or substantial reconstruction then it is capital in nature rather than a deductible repair.  For example, fixing a fence is a deductible expense in the year the expense is incurred whereas replacing a fence or erecting a new fence would represent a capital improvement which needs to be depreciated/written down as a expense over a number of years.

Certain maintenance costs are also considered ‘repairs’ in the context of claiming a deduction. The common understanding of ‘maintenance’ includes costs that are incurred for prevention of defects, damage or deterioration of the property or to rectify defects in their early stages. These costs will only be deductible as a ‘repair’ if the property was in actual need of repair. For example, painting the property to rectify existing deterioration and to prevent further deterioration would be a deductible maintenance cost. However, in contrast, any maintenance work done to the property that is not in need of repair would not be deductible.

Maintenance Costs That Are Not ‘Repairs’

As noted above, where the maintenance costs do not constitute ‘repairs’ no deduction is available. The cost of capital works associated with building extensions, alterations or

structural improvements are not outright deductible but may be eligible for deduction over a number of years. For most residential rental properties, these expenses are claimed over 40 years, at the rate of 2.5% per annum.

Initial repairs are capital in nature. These represent repairs that are undertaken to remedy defects, damage or deterioration of the property that existed at the time the taxpayer purchased the property. Whether the taxpayer was aware of these damages, defects or deterioration has no bearing on their ability to claim deductions.

In addition, any travel and accommodation costs relating to the initial repairs are also considered to be capital in nature and hence not deductible.

Repairs Checklist for Landlords

The following checklist summarises the type of expenditure that is or isn’t a deductible repair.

 

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Contact Online Tax Australia for All Your Rental Property Claims

Making sense of the regulations around rental property deductions is difficult and the frequency of law changes only increase this difficulty. If you need an agent on hand to make sure you get all the deductions you’re entitled to, contact the friendly team at Online Tax Australia today: