Rental Properties: Repairs Versus Improvements

If you own an investment property knowing the difference between a rental property repair as opposed to an improvement is essential, in particular when it comes to boosting the returns of your property and maximising tax benefits. The Australian Taxation Office (ATO) has cracked down on property owners after receiving a multitude of incorrect claims; and they treat these two terms differently.

What counts as Repairs and Maintenance?

The easiest way to figure out what work falls under repairs and maintenance is to ask yourself: “Am I returning the property to its original state?” If the answer is yes, then you can tick it off as either a repair or maintenance job.

There is a subtle difference between repairs and rental property maintenance. Repairs are about mending wear and tear, and damage, while maintenance looks at preventing or fixing deterioration.

Essentially, if you’re fixing something that’s “worn out, damaged or broken as a result of renting out the property” then it’s considered a repair.

Some common examples of repairs and maintenance include:

  • Fixing leaking taps
  • Replacing part of a storm-damaged fence
  • Replacing a broken window
  • Replacing part of the guttering
  • Repairing an air-conditioner or other electrical appliances

What Counts as Capital Improvements?

Just like with repairs and maintenance, the easiest way to know whether the work you are carrying out is a capital improvement is to ask yourself a simple question: “Am I improving the condition of the property to make it better than it previously was?” If the answer is yes, then consider it a capital improvement to your rental property. Pretty straightforward right? However, be aware there are two types of capital improvements: Capital Works and Depreciating Assets.

Capital Works – are any type of construction job where you are improving or adding something to the property’s structure. Many property owners do this to improve the income-producing ability of their investment.

Some typical examples of Capital Works you might consider when deciding how to improve your rental property could be:

  • Replacing a roof with better quality roofing
  • Adding a room
  • Major renovations like a new kitchenette
  • Adding a fence to the premises
  • Installing a driveway or retaining wall
  • Replacing a structure that’s partially damaged (e.g. fence, wall, flooring) with an entirely new structure

Depreciating assets – are items that don’t end up forming part of the actual property but can be installed and removed with relative ease. These ‘plant assets’ also have a short life span, so they’ll need to be replaced within a relatively short period of time.

Examples are things like a new:

  • Oven
  • Rangehood
  • Dishwasher
  • Carpet
  • Timber flooring
  • Curtains
  • Refrigerator
  • Furniture

In summary, the critical difference between repairs and maintenance, and capital improvements is that:

  • Repair and maintenance expenses can be claimed in the same financial year in which you incurred them.
  • Capital improvements have to be claimed over a number of years.