Rental Properties: Repairs vs Capital Improvements

Sometimes is not easy to recognise the differences between them.

For instance, the ATO instructs that a rental owner is entitled to claim the costs of any type of work done to an investment property, provided that the expense ultimately contributes towards its overall maintenance and repair.

In general, the term repairs is used for actions that are needed to preserve the health of any assets or properties. That is, addressing defects, damages or deterioration of the asset keeping it in good and working condition for their effective life. In this case, the expense related to the asset can be claimed in your return as a deduction.

Some examples of repairs below:

• repairing window glass
• cleaning air ducts and vents
• plumbing or electrical repairs
• replacing sewer pipes

On the other hand, if you carry out work on your rental property that requires substantial reconstruction or replacement of features of the property, then this is treated as an ‘improvement.’ The expenses involved in improvements to the asset are capital in nature and therefore not deductible.

Capital improvements (or additions) are added to the cost base of the property and have an allowable deduction of 2.5% per annum over a 40 years period.

Some examples of improvements below:

• Adding an internal wall
• Extending the size of a bedroom
• Replacing the roof of the house
• Remodelling the kitchen or bathroom
• Adding a swimming pool

It is important to mention that the ATO has specific guidelines that provide a clear understanding of the differences between repairs and additions so we strongly encourage clients to read the information provided using the below link and contact one of our accountants to get further information.