When it comes to investment property repairs, they can be tax deductible or must be capitalised as a renovation or improvement.
Recently, the ATO has been looking into excessive claims for rental property deductions and the one area that has been in the firing line is incorrect claims for repairs. The distinction between a tax deductible repair and a capital improvement walks a fine line and as a result, it’s very easy to make a mistake. Here’s a breakdown of the differences..
The tax legislation does not actually define the term “repair” for us. The ATO does however have a tax ruling that gives us an interpretation as to what is allowable as a repair and what is not.
As per the ruling, a repair means:
The test is if the work done produces a new, improved or different function than the original item and whether the wear and tear being remedied was already existing when acquired or not. For instance, repairing an existing window frame so it can be opened and shut again would be deductible. Putting a new window into the home to let more light in would be an improvement rather than a repair, and would therefore not be a deductible expense.
Second hand assets, including assets acquired in a second hand residential property, are not entitled to claim depreciation from the 9th May 2017, as the law was changed at this date. They need to be brand new assets acquired for this deduction to be allowed.
For more information on how repairs, capital improvements and assets are claimed for your rental property get in touch with us.
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