Classifying Repairs and Renovation in Rental Properties

How do we determine whether the work done is a repair or an improvement?

If you own a rental property this is very important in terms of the tax consequences.  It is the difference between claiming the cost as a deduction or having to depreciate the cost.

So how do we identify a repair as opposed to an improvement?

Some guidelines are as follows:-

  • A repair would normally mean the replacement of a worn-out part of something and not the replacement in its entirety.
  • The repair must be to something that is physically in need of repair – prevention is not repair;
  • Repairs means restoring parts of an entire thing not replacing the thing in its entirety;
  • If your repair is done to restore the function even if different materials are used then that is OK but it cannot go past restoring it to its former level. Therefore, replacing with like materials is very different to replacing wood with concrete for example.

If you have any questions as to whether what you are proposing to do is either a repair or improvement give Balanix a call on 3264 4783 before undertaking the work.  Once the work is done it is too late and could mean the difference between claiming the work as a deduction against current years income and having to depreciate it over the life of the asset.

David Balwin Tax Accounting CFO Business Advice