Repairs, Maintenance, Capital Improvements and Initial Repairs: A Fun Guide for Property Investors

October 2, 2024

Regina Chia

Navigating property expenses can be tricky, but knowing the difference between repairs, maintenance, capital improvements and initial repairs is key to maximizing your tax deductions. Here’s a fun and simple breakdown to help you get it right!

What Are Repairs?

Repairs are all about fixing what’s broken or worn out to get things back to their original state. For rental properties, repairs keep the property as it was when you bought it. Examples include:

• Replacing a broken oven door
• Patching a hole in the wall
• Resealing a leaking bathtub
• Replacing a broken window
• Fixing broken roof tiles

The best part? You can fully deduct repair costs in the year you pay for them. So, if you repair something this year, you can claim the whole amount on your current tax return.

What Is Maintenance?

Maintenance is like regular check-ups for your property. It’s about keeping things in good shape and preventing issues before they start. Examples include:

• Repainting an interior wall
• Re-staining a wooden deck
• Cleaning a swimming pool
• Maintaining the lawn and garden
• Conducting pest control

Like repairs, maintenance costs can also be fully deducted in the year you pay for them. Just make sure the property is used to generate income to claim these expenses.

What Are Capital Improvements?

Capital improvements are major upgrades that boost your property’s value or extend its life. They’re treated differently for tax purposes. Examples include:

• Replacing an entire roof
• Renovating or repairing the whole house
• Adding new rooms
• Installing new fences
• Replacing major assets like ovens or carpets

If a capital improvement costs more than $300, it must be depreciated over time. This means you’ll deduct a portion of the cost each year based on the asset’s effective life. For instance, if you install a new tile roof costing $20,000 with a lifespan of 40 years, you’ll depreciate it at 2.5% per year.

Capital improvements fall into two categories:

1. Capital Works Deductions (Division 43): This covers the depreciation of the building’s structural components, like floorboards, windows, and walls. For a standard residential property built after 15 July 1987, the effective life is typically 40 years, with a 2.5% annual depreciation rate.
2. Plant and Equipment Depreciation (Division 40): This pertains to movable items like blinds, air conditioners, and ovens. Each item has its own effective life and depreciation rate.

What Can’t You Claim on Your Investment Property?

You can’t claim costs for fixing damage that existed when you bought the property, whether you knew about it at the time or not. This is known as initial repairs.

Initial Repairs

These repairs should be treated as capital expenses, which means they are added to the property’s cost base. This helps reduce your capital gain when you sell the property but doesn’t allow you to claim them against your taxes in the first year.

Examples of Initial Repairs:

• Fixing a Damaged Roof: If the roof was damaged when you bought the property.
• Repairing Electrical Systems: If the electrical systems were faulty when you bought the property.
• Plumbing Repairs: Fixing pre-existing plumbing issues.
• Restoring Damaged Flooring: Repairing or replacing flooring that was in poor condition when you bought the property.

Quick Reference for Tax Deductions:

• Repairs: Deduct the full cost in the year incurred.
• Maintenance: Fully deductible in the year paid.
• Capital Improvements: Costs over $300 must be depreciated over the asset’s effective life.
• Initial Repairs: Not deductible in the first year. Treat as a capital expense to adjust the property’s cost base and reduce capital gain upon sale.

Understanding these distinctions will help you make the most of your deductions and keep your tax filings in good order.