When you own a rental property, managing repairs and improvements is essential to maintaining its value and ensuring tenant satisfaction. However, understanding how to categorise these expenses for tax purposes can be a bit tricky.
Here’s a guide to help you differentiate between repairs and capital expenses and how to claim them correctly on your tax return.
Repairs and General Maintenance
Repairs and general maintenance are expenses incurred to fix defects, damage, or wear and tear from using the property to earn income. These could include fixing a leaky faucet, repainting walls, or repairing a broken window. The key point here is that these costs are necessary to keep the property in good working condition and do not improve it beyond its original state.
You can claim these expenses in the same year they occur, making it straightforward to account for them in your annual tax return.
Initial Repairs
When you purchase a rental property, you might find issues that need fixing right away, such as a damaged roof or faulty plumbing. These initial repairs, done to correct problems that existed at the time of purchase, are considered capital expenses.
Even if you weren’t aware of the issues when buying the property, these costs cannot be claimed as immediate deductions. Instead, they are added to the property’s acquisition cost and are factored into the capital gains tax (CGT) calculation when you eventually sell the property.
Capital Works
Capital works involve structural improvements, alterations, or extensions to the property. This could include adding a new room, renovating a kitchen, or installing a new roof. These are considered long-term improvements that enhance the property’s value and functionality beyond its original state.
You can claim capital works at a rate of 2.5% over 40 years (with some exceptions), starting from when the work is completed. It’s important to note that you can only claim these deductions once the work is finished, regardless of when you pay for the services.
Improvements vs. Repairs
It’s crucial to distinguish between repairs and improvements. Repairs are actions taken to restore the property to its original condition, while improvements enhance or upgrade the property. For example, fixing a broken heating system is a repair, but replacing it with a new, more efficient system is an improvement.
Repairs to an ‘entirety’ (a complete unit or structure) are treated as capital expenses. For instance, replacing an entire roof is considered a capital expense rather than a repair.
Depreciating Assets
Certain items in your rental property, such as appliances, are considered depreciating assets. These assets decline in value over time and can be claimed as deductions through depreciation. The rate at which you can claim these deductions depends on the effective life of the asset, as determined by tax regulations.
Confused About Managing Rental Property Expenses?
Handling repairs, improvements, and tax deductions for your rental property can be a bit challenging. At Clear Tax Accountants, we’re here to make it simpler for you. We’ll help you understand the difference between repairs and improvements, manage your deductions, and ensure everything is in order for your tax return.
Get in touch with us today for a consultation! We’ll guide you through the process and help you make the most of your property expenses.
Reach out now, and let’s make managing your property and taxes easier!
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