Is it a repair or an improvement? – What’s the difference?

Expenses that relate to repairs and maintenance of a rental property will usually be deductible when they are incurred. Any work that is considered to be an improvement, such as installing a new kitchen, will not be deductible and instead deemed to be a capital item that you can depreciated over time.

A few points to consider:

  • A repair is the replacement or renewal of a worn out part of something, but not the entirety. For example, if some part of the carpet needs to be replaced that would be a repair, but if you replaced the entire carpet throughout the house, that would be an improvement and not immediately deductible
  • An item is considered to be a repair when it brings something back to its operational efficiency, but does not significantly improve it. For example, a few light fittings may need replacing. Normally this would be considered a repair, but if you put in expensive chandeliers, it would be considered an improvement and not a repair.
  • Initial repairs after you buy a property will often be considered capital improvements. The ATO considers that these repairs would have been factored into the purchase price and therefore are considered capital in nature.

So if you’ve just purchased an investment property it may make sense not to conduct any repair work for some time, unless it is of course necessary for safety issues. There’s no fixed time specified by the law, but if you were to claim a large amount of repairs in your tax return the first year you purchased a property, it could arouse the interest of the Australian Taxation Office.

If you are uncertain about any of the above, your accountant will be able to give you further guidance.

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