As a property investor, knowing your entitlements at tax time can make a huge difference to the amount of profit you make on your investment property. If you are renting your property to tenants, you are entitled to a few tax deductions and benefits that could help you maximise returns on your investment. In recent years however, the ATO has clamped down on rental property owners who have made incorrect claims come tax time.
One of the biggest mistakes property investors make is not understanding the difference between repairs, maintenance and capital improvements, and more specifically how to treat these different expenses as tax deductions. Here’s some property investment advice to help you claim deductions correctly.
The difference between Repair, Maintenance vs. Capital Improvements?
- Repairs – According to the ATO, repairs are works carried out to resolve damage to the premise and general deterioration of the rental property. Repairs will effectively restore your property to its original state before damage was incurred. If, however, a major element of your rental property is damaged beyond repair and requires replacing (i.e. the roof), this could then be classified as a capital improvement, and will be treated in a different way come tax time.
- Maintenance – Maintenance is defined as any work carried out to your property to prevent damage or resolve existing deterioration. This can include works such as painting your rental property. Routine and preventative maintenance are minor works which help keep your rental property in its original, functional condition.
- Capital improvements – As opposed to repairs and maintenance, which maintain and restore your rental property to its original condition, capital improvements are any works that better your property beyond its original state. Generally speaking, a capital improvement will increase the value of your investment property, boost its income-producing capacity and increase the expected life of your Perth rental. The ATO also defines capital improvements as works that provide something new to your property (i.e. extensions) and additions that change the character of your rental (i.e. renovations and remodelling).
The different tax rules
Providing damage and deterioration results from the leasing of your property (as opposed to private use), you are generally able to claim tax deductions for any repairs and maintenance in the same financial year the costs are incurred. However, the case is not the same for capital improvements. Capital improvements and additional constructions will have to be claimed over a number of income years as either capital works deductions (relating to expenses such as construction costs) or depreciable assets (the decline in value of plant and equipment such as carpets, curtains etc.).
If you plan on undertaking work on your Perth rentals, you will need to keep all repairs, maintenance and capital improvements documented so you can categorise these items correctly when you lodge your tax returns. The best practise here is to enlist the help of a finance professional who can advise you as to when and how you should be claiming tax deductions.
Exceptions to the rule
When you first purchase an investment property, you may need to carry out repairs before the property is advertised for rent. These are known as ‘initial repairs’ and are not immediately deductible in your yearly tax return. Instead, these expenses are considered as part of your property’s acquisition costs. Don’t worry – these costs can be added to the cost base of your rental property to minimise capital gains tax when you decide to sell.
Caring for your rental property
The actions you take to look after your property over time can make a big difference to your rental returns and the overall value of your investment. If you want to make sure you’re getting the most out of your Perth rentals, you should consider enlisting the help of a professional property management service. Property managers will oversee the day-to-day running of your rental property, ensuring your investment remains in good condition throughout its rental use.
As well as overseeing the overall care of your Perth rentals, the property management specialists at Rentwest will help you make those small decisions that could make a huge difference to the value of your investments in the long run.
To find out more about Rentwest’s property management solutions, call us on 9314 9888 or email us at firstname.lastname@example.org.
Note: The information provided in this article has been sourced from the ATO website. For more information on how to correctly claim tax deductions, please consult the ATO or a relevant finance professional.