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Investor pitfalls - repairs and maintenance

By Greg Carroll

Repairs and maintenance is one of the main areas where there is a great deal of misunderstanding and ill-conceived plans by investors.

To be a legitimate claim, expenditure for repairs and maintenance must relate directly to wear and tear or other damage that has occurred as a result of your renting out the property. This will generally involve replacement or renewal of a worn out or broken part.
 
For example, replacing some guttering damaged in a storm or part of a fence that was damaged by a falling tree branch.
 
Repairs to a rental property will generally be deductible if:
• the property continues to be rented on an ongoing basis, or
• the property remains available for rental but there is a short period when the property is unoccupied for example, where unseasonable weather causes cancellations of bookings or advertising is unsuccessful in attracting tenants.
 
If you no longer rent the property, the cost of repairs may still be deductible provided:
• the need for the repairs is related to the period in which the property was used by you to produce income, and
• the property was income-producing during the income year in which you incurred the cost of repairs
.
However, the following expenses are capital, or of a capital nature, and are not deductible:
• replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards or refrigerator)
• improvements, renovations, extensions and alterations, and
• initial repairs in remedying defects, damage or deterioration that existed at the date you acquired the property.

A typical example - The Smiths have purchased a property which they intend to rent out. Prior to marketing the property for tenants they undertake a number of repairs including repainting some walls, replacing broken light fittings, repairing two doors, doing up the bathroom and putting in a new kitchen. The cost of the works is $25000 and the Smiths record this as repairs and maintenance on their next tax return expecting a nice big tax refund..

The ATO as a result calls for an audit as the figure seems excessive for repairs. They identify that these expenses were incurred to make the property suitable for rental but did not arise from the property’s use as an investment property and were in fact capital in nature. They therefore reject the claim and apply penalties to the Smiths.
 
At best the Smiths would have been entitled to would be to claim these costs as capital works deductions possibly only at 2.5% over the next 40 years. In other words a deduction of $625 a year.