A question that our firm is frequently asked is, ‘I am about to move out of my home and plan to do some repair works on the property before I rent it out. Are the costs of such repairs tax deductible?’
This is not a straightforward question to answer as there are various factors to consider.
Generally, a deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income producing purposes:
(a) even though the property has previously been held, etc. by the taxpayer for non-income producing purposes (eg. own home or principal place of residence); and
(b) even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer’s holding, etc., of the property before its holding, etc. for income purposes, and
(c) provided that the repair is not capital expenditure.
Besides these, there are other matters to consider:
1. Whether the repair is classified as an ‘initial repair’
An ‘initial repair’ is repair that was due when the property was acquired and repaired after the acquisition of a property. In other words, the property was not in good order at the time of purchase. If a repair is classified as an ‘initial repair’, then the full amount is not immediately tax deductible and will have to depreciated over a number of years.
2. Repair versus Improvement
Repair involves restoration of a thing to a condition it formerly had without changing its character. Renewal, replacement or reconstruction of the entirety (ie. the whole or substantially, the whole) of a thing or structure is an improvement rather than a repair.
Repairs are immediately deductible. However, improvements must be depreciated over a number of years.
For example, repairing part of a damaged fence is a repair, but replacing the entire fence is an improvement.
3. Timing of Repair
The timing of repair must be considered when there is private use of the property (eg. as principal place of residence before or after it is available for rent).
If the property was occupied for private use prior to being rented out, then the following must be considered:
- Repair expenses are incurred after the property is advertised for rent with broad exposure to potential clients (this excludes advertising by word of mouth), and
- Repair expenses must be incurred in the same financial year that the property generates an income.
For example, a rental property may be vacant but is advertised as being available for rental. Before the tenant moves in, storm damage occurs. Expenditure to repair the damage is tax deductible under Section 25-10 because the property is held for incoming producing purposes.
4. Free standing versus permanent fixtures
The cost of replacing free standing items such as ovens, refrigerators or furniture is capital in nature, which means that they have to be depreciated over a period of time.
The cost of replacing permanent fixtures such as locks and exhaust fans are immediately deductible in the year that they are incurred.
Additional Reading Material: Tax Ruling TR 97/23
Disclaimer: This blog post has been simplified to cover the common scenarios. This should not be construed as advice from Fortiz Accountants. There are many other factors to be considered and each case is unique. Therefore, we encourage readers of this blog post to contact Fortiz Accountants for assistance with their specific circumstances.
If you own an investment property or are thinking of purchasing one, it’s always wise to seek advice from a property-savvy accountant – that’s us! Make an appointment with us at either one of our offices to find out how we can assist you.