Instead of waiting until the financial year draws to a close, it can be useful to educate ourselves around the guidelines set out by the ATO in regards to possible tax deductions and tax offsets that are available for your investment property throughout the year so that you are aware of what work needs to be completed and what records need to be maintained and recorded.
We do appreciate that the focus of every landlord is to optimise their tax returns and maximise their income, however, it is important to be aware of when and how you are able to claim repairs and work on the property as a legitimate tax deduction.
Expenses before a property is rented.
Unfortunately you can not claim the cost of repairing defects, damage or deterioration that existed when you obtained the property, even if you carried out these repairs to ensure the property was suitable for renting. This is because these expenses relate to the period before the property became an income-producing rental property. These expenses are capital expenses which means you can not claim a deduction for them.
When completing your tax return (including your investment property) you must keep records of the rental income you receive and the expenses you pay. Your agent will usually offer an end of financial year statement which will collate all the information for you.
Capital gains tax
You must keep your records of ownership of the property and all the costs for purchasing/ acquiring and selling/ disposing of the property’s records for 5 years including from the date you sell/ dispose of your rental property.
As capital gains tax may apply if you sell your rental property, we recommend you keep records of every transaction over the period of ownership of the property.
This would include contracts of purchase and sale, and conveyance and loan documents.
Keeping these records will help you work out your capital gain or loss accurately and ensure you do not pay more tax that you need to.
The difference between repairs, maintenance & improvements in relation to investment property tax deductions
When the ATO refers to “maintenance” their definition is work to prevent deterioration or repairing existing deterioration. For example; re-carpeting a rental property or 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 can not 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 or deductions for a decline in value. When the ATO refers to “improvement” their definition relates to:
- Providing 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
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.