You are entitled to tax deductions if you are renting out a property you own. However, many rental property owners file incorrect tax returns, as they are unaware of their landlord responsibilities and which costs they can claim. The major error most people make relates to property repairs and renovations.
In this guide, we outline the differences between repairs and capital improvements in the eyes of the Australian Tax Authority (ATO). Learn the definitions of each and how you can claim the right deductions come tax-filing season.
What are the Differences Between Repairs and Capital Improvements?
Repairs and capital improvements are not the same. When it comes to filing your tax return, it’s important you know the difference:
- Repairs: According to ATO guidelines, repairs include any work done to fix damage to your property that occurs as part of renting it out. Repairs are necessary to restore your property to how it was before the damage occurred and can be claimed as part of your end-of-year tax deductions.
- Capital Improvements: Capital works or improvements concern structural work that enhances your property for future tenants. This goes beyond simple repairs and maintenance and can include works such as roof replacements, extensions, and garden renovations.
Tax Rules for Claiming Deductions
There are different rules regarding how to claim expenses for rental property repairs vs. capital improvements:
- Repairs: The ATO rental expense rules state that you can only claim tax deductions for repairs and maintenance if your property is continually rented out or remains genuinely available to rent. Any claims for property repairs must be made in the financial year when you incurred the costs.
- Capital Improvements: You cannot claim capital improvements on your rental property as deductions in the same tax year. Instead, capital works must be claimed at 2.5% over 40 years only after the improvements have been completed. You can also claim capital works as depreciable assets.
Claiming Deductions on Initial Repairs
You may find that repairs are needed when you first buy a property. These are known as initial repairs and cannot be claimed as a tax deduction. Any defects or breakages that existed when you acquired the property are counted as capital repairs and form part of the acquisition cost.
Hire Experienced Tax Advisors to Claim the Right Property Deductions
There’s no point in second-guessing your tax return. If even a small part of you is unsure whether you can claim deductions for your rental property repairs and capital improvements, it’s worth hiring a specialist.
Don’t risk falling behind on your taxes or overpaying your fair share. At Glance Consultants, our team of trained chartered accountants can take care of your rental property taxes, helping you claim the right deductions and pay the correct tax obligations. Contact us today to optimise your tax payments.
