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Investment Property Tax Tips: Renovations and Repairs

Investment Property Tax Tips: Renovations and Repairs

Do you own an investment property and are wondering what the tax implications are of renovating? In this blog, we explore the ins and outs of tax deductions regarding property renovations in Australia.

The difference between renovations and repairs

It’s important that you are clear on whether the improvements you plan to make are renovations, routine maintenance or repairs, as this impacts how you claim them on tax. Repairs can be claimed in the current tax year, while renovations are considered ‘capital works deductions’ and are claimed over a longer period.

Renovations are improvements that are made to increase the value of the property you own and rent out to tenants. The intention is to raise the future sale price, improve the rental yield, or make the property more desirable to tenants. This could include minor upgrades, such as adding storage or building a pergola. More major structural changes might include renovating the kitchen or bathroom or adding an extension.

Repairs, on the other hand, are about addressing a maintenance issue, for example, repairing a broken air conditioning system or dealing with a roof leak.

So, are investment property renovations tax deductible?

Yes. If you are renovating a property for the purpose of generating income, such as by increasing its rental yield or capital value, then you can claim a tax deduction for the cost of the renovations. These are classified as ‘capital works deductions’ and are claimed over a longer period of time as depreciation.

Investment property depreciation refers to offsetting the decline in value of the improvements against your taxable income.

The ATO describes improvements that should be classified as capital works deductions as the following:

  • provides something new
  • furthers the income-producing ability or expected life of the property
  • goes beyond just restoring the efficient functioning of the property.

If you are planning on renovating your investment property, it’s important to seek professional advice from a qualified accountant or tax specialist to ensure that you understand the tax implications and are complying with ATO regulations.

Are investment property repairs tax deductible?

Yes. Expenses that are incurred in the ordinary course of running a rental property, such as repairs and maintenance, are usually fully deductible in the year they are incurred. Examples of this might include repairing a damaged fence, repainting the walls or repairing broken appliances.

You must keep detailed records of all expenses, including receipts and invoices, to substantiate your claims. This is important to ensure that you don’t get caught out in the event of an ATO audit.

As was mentioned above, it is important to seek professional advice as distinguishing between repairs and renovations is not always straightforward.

In conclusion, it’s important to understand the tax implications of your investments. By taking the time to understand the tax deductibility of investment property renovations or repairs, you can make informed decisions that will help you maximise your returns.

We specialise in helping property investors make the right investment choices. If tax considerations are a priority for you, book a free consultation with us today, and we’ll help you establish an investment strategy and find properties to suit your goals.