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What home renovations are tax deductible?

What home renovations are tax deductible?

For property investors, understanding what home repairs, maintenance or improvements are tax deductible is crucial come tax time. 

Generally speaking, some of the most common rental property tax deductions an investor may claim can include:

  • Repairs to the property
  • Management and maintenance costs
  • Depreciating assets
  • Interest repayments on a mortgage
  • Body corporate fees
  • Property management fees
  • Council rates
  • Cleaning expenses
  • Advertising fees
  • Land tax

But it’s not uncommon for investors to make simple mistakes when determining what can or cannot be lodged as a deduction. Some investors may be failing to claim their full tax entitlements as well, including depreciation benefits, due to a lack of knowledge. 

These factors can potentially impact your tax refund and reduce your return on investment from said property. So, let’s explore which home renovations are tax deductible for property owners.  

Tax deductible home repairs and maintenance for property owners

According to the Australian Taxation Office (ATO), you can claim a tax deduction for expenses relating to repairs and maintenance. However, it is crucial that you understand the differences between the two before you make a claim. 

Repairs 
Generally repairs must relate “directly to wear and tear or other damage that occurred as a result of your renting out the property”, according to the ATO. This may include:

  • Replacing broken windows
  • Repairing electrical appliances or machinery
  • Replacing part of the guttering damaged in a storm
  • Replacing part of a fence damaged by a falling tree branch

Maintenance

Maintenance refers to the ways in which owners keep the property in a tenantable condition. It includes work to “prevent deterioration or fix existing deterioration”, according to the ATO. This may include:

  • Repainting faded or damaged interior walls.
  • Oiling, brushing, or cleaning something that is otherwise in good working condition. For example, oiling a deck or cleaning a swimming pool.
  • Maintaining plumbing.

The ATO advises that the cost of repairs and maintenance may be fully deductible in the year you incur them if:

  • “The expense directly relates to wear and tear or other damage that occurred as a result of renting out your property, and
  • The property continues to be rented on an ongoing basis, or remains available for rent 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”.

Tax deductible home improvements for property owners

Property investors may also be able to make claims on improvements made to the property, which are separate from ‘repairs’ or ‘maintenance’. Improvements are defined as anything that “makes an aspect of the property better, more valuable or desirable, or changes the character of the item on which works are being carried out”, according to the ATO. 

This may include work that furthers the “income-producing ability or expected life of the property” or work that “goes beyond just restoring the efficient functioning of the property”. Improvements can either be classified as capital works or capital allowances.  

Capital works refers to where work is a structural improvement. The rate of deduction is typically 2.5% per year for 40 years post-construction. Examples may include:

  • Major renovations to a room
  • Structural improvements like retaining walls
  • Costs of altering a building
  • Extensions such as garages or patios
  • Adding a fence

Capital allowances refers to where the item is a depreciating asset that is not likely to be permanent, not part of structure and separately identifiable. Examples of the types of improvements that may be classified as a depreciating asset include:

  • New carpets
  • Timber flooring
  • Appliances like a washing machine or dishwasher
  • Curtains 

Property investors may want to engage in the services of a quantity surveyor, who can report with a depreciation schedule for claims for the rental property or holiday home at the time of purchase.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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