What property investors need to know about repairs vs improvements


The difference between repairs and improvements can be confusing for property investors.

I mean… what is a repair?  When does a repair become an improvement?

And how do you know what’s tax-deductible and what isn’t?

Fortunately, the Australian Tax Office sheds some light on these questions.

What is a repair?

A repair replaces a part of something or corrects something that’s already there and has become worn out or dilapidated.

It’s usually occasional or partial and involves restoring something to its original efficiency. renovation-DIY-reno-paint-repair-handyman-contractor-painter-fix-value

Repairs make good damage that has occurred through normal wear and tear accidental or deliberate damage, or through the effects of natural causes.

Note, however, that repairs are generally partial.

Replacing a faulty filter in a dishwasher may be a repair; replacing the dishwasher generally is not.

You may be able to claim an immediate deduction for expenditure on repairs if you’re using your property to generate income.

However, if you’re claiming repairs as a deduction, you must be aware there is a difference between a repair and an improvement, as you cannot claim an immediate deduction for improvements.

But you may be able to claim a capital works deduction for improvements.

Although there’s a difference between ‘maintenance’ and repair, you can generally claim an immediate deduction for maintenance costs.

What is an initial repair?

Quite often when you buy a rental property, there may be defects that need to be fixed before your first tenants can move in.

A repair is not an initial repair simply because it’s the first repair made after you acquired your property.

Broadly, it’s an initial repair if the defects, damage or deterioration in need of repair existed when you acquired the property.

In other words, if you buy a property to generate income, the cost of bringing that property to a state where it’s suitable for tenants is considered part of the cost of its acquisition, not the cost of repairing defects that arose while you were renting it.

You can’t claim an immediate deduction for initial repairs, even if you start to rent the property before you carry out the repairs.

Generally, the cost of the initial repairs may be included in the capital gains tax cost base of your rental property.

Difference between a repair and an initial repair renovation property

The difference is that generally, repairs made to defects that arise while our property is producing income are tax-deductible, while initial repairs are not because they lack a connection with your use of the property to produce income.

Essentially, an initial repair is an additional cost of acquiring your property or an improvement to the property.

If you’ve spent money on fixing a problem that existed when you bought the property, it’s a capital expenditure, even if your tenants move in before you make the initial repair.

It doesn’t matter whether or not you knew the property needed initial repairs when you acquired it, or whether the purchase price of your property reflected the need for repairs.


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