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The difference between repairs, maintenance and improvements in relation to investment property tax deductions?!

30 May 2013 Salisbury Professionals 0 Comment


When the ATO refers to “maintenance”, their definition is work to prevent deterioration or repairing existing deterioration.

For example:

* Re-carpeting a rental property

* Re-wiring electricity within the property

A claim for a deduction of the costs you pay to repair and maintain your rental property can be made in the year you pay for the works, however you cannot claim the total costs if they did not relate directly to wear and tear or other damage that occurred due to renting out your property.

These then become capital expenses which may be able to be claimed over a number of years as capital works deductions for a decline in value.

When the ATO refers to “improvement” their definition relates to:

For example:

* Provides something new

* Generally furthers the income producing ability or expected life of the property

* Generally changes the character of the item you have improved

* Goes beyond just restoring the efficient functioning of the property

A claim for a deduction for the total cost of improvements to your rental property cannot be claimed in the year you incurred them.

However, parts of the work may be able to be claimed – such as repairing an existing light, the remaining of the costs will also fall under capital expenses and can be claimed over a period of time.

Tax depreciation schedule

According to Australian Tax Depreciation Services only 20% of investors fully utilise the tax advantage of the available tax depreciation benefits of their investment property.

Any building irrespective of age will attract some claim for depreciation. Therefore, many owners are losing potential tax credits each year by failing to take advantage of this.

Essentially, there are three components to a depreciation schedule. The first is Capital Works Depreciation, the second is Depreciation on Plant & Equipment and the third is Renovations and Improvements. Capital Works Depreciation is based on the original construction cost.

Depreciation on Plant and Equipment is where items such as carpet, blinds, ovens and many more items can be depreciated at accelerated rates. Renovations and Improvements allows for capital improvements done to the property.

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