Rental property – repairs or capital expenses?

When our investment property clients have work done on their rental property we need to ensure the expense is categorised correctly to avoid errors when completing their tax returns.

Repairs and maintenance

‘Repairs and maintenance’ expenses can be claimed for work done to remedy, or prevent defects, damage or deterioration from using the property to earn income.

These expenses can be claimed in the year they were incurred.

Capital expenses

• Initial repairs include fixing any pre-existing damage, or deterioration that existed at the time of purchasing the property, even if the damage or deterioration was unknown to your clients at the time of purchase. Initial repairs are part of the acquisition cost and included in the cost base of the property for CGT purposes, unless they’re:
  • capital works
  • depreciating assets.
• Capital works are structural improvements, alterations and extensions to the property:
  • claimed at 2.5% over 40 years, with some exceptions
  • can only be claimed after the work has been completed, regardless of when your client pays the deposit and instalments.
• Improvements or renovations that are structural are also capital works. Work that goes beyond remedying defects, damage or deterioration that improves the function of the property, is regarded as improvements.
• Repairs to an ‘entirety’ are capital and can’t be claimed as repairs. Repairs to an entirety generally involve the replacement or reconstruction of something separately identifiable as a capital item, for example, a depreciating asset.
• Depreciating assets (capital allowances):
  • ‘new’ assets must be claimed over time according to their effective life
  • second-hand depreciating assets generally can’t be claimed.

If you are a property investor you can use the ATO’s Rental repairs fact sheet (part of the Investors toolkit), which includes a ‘Quick reference guide’ to help guide conversations with your clients about what they can claim and when.