Ever wondered if you should be claiming your rental repairs and replacement expenses as a tax deduction or if they should be depreciated as assets on your tax return? The following will provide a rough guide and a few examples of when repairs and replacements are treated as expenses or assets (capital expenses), and whether they can be claimed on your tax return.
How will the difference between repairs and capital expenses affect your tax return? 100% of the cost of repairs can be claimed as a rental deduction on your tax return in the year that the expense was incurred. However, capital expenses will need to be depreciated on your tax return, meaning that the cost will be claimed over a number of years depending on the effective life of the asset.
For example, a hot water system has an effective life of 15 years which means it will be depreciated at 13.33% (200/15) if using the diminishing value method. This means that in the year of purchase for a hot water system costing $1,500, you will only claim $200 ($1,500 x 13.33%) depreciation as a rental deduction on your tax return. Then in the following year you will claim $173 ($1,300 x 13.33%) depreciation on your tax return.
A repair is generally considered partial work on something to restore it to its previous condition and functionality. But complete replacement, or restoration to a greater value, would be considered a capital expense.
For example, the repair of an air conditioner (which may mean the replacement of just one part, ie. the motor) is an expense. But replacement of the entire air conditioning system is a capital expense, as would be the replacement of the motor with a better motor. Likewise, repairing a few broken boards on a fence would be considered a repair, but replacing the entire fence would be considered a capital expense.
However, there is a $300 rule for assets. An asset costing less than $300 does not need to be depreciated. It can be claimed 100% as a rental deduction.
The $300 rule does not apply to repairs. If the repair can truly be considered a repair and not a capital expense, then it can be claimed 100% as a rental deduction even if it costs more than $300.
Repairs may be claimed as rental expenses on your tax return as long as they are a result of wear and tear due to renting out the property. Repairs made to the property, due to wear and tear from tenants, while it is vacant between tenants are also allowable as long as the property is available for rent.
If the repairs are performed just after the tenants move out in preparation for you to move in, they may also be considered normal repairs due to wear and tear from renting out the property. These can be claimed as a rental expense on your tax return in the year that the tenants moved out.
If the repairs are performed just after the purchase of the property in preparation to rent it out, then they are considered to be initial repairs. These cannot be claimed as a rental expense on your tax return. Instead they will form part of the cost base of the property and will reduce your capital gain when you sell the property.
This is general advice only and should not be relied upon for your personal circumstances. If you would like advice specific to your circumstances, please contact us on 03 9331 6855 or info@ktassociates.com.au to speak to one of our professionals.