rental property

What is an initial repair for my rental property

An Initial repair occurs when you acquire a new rental property that has existing known repairs. The old house needs fixing before it can be rented. Initial repairs may include such things as plumbing, painting, new carpet or appliance repairs just to name a few

Initail Repairs must be capitalised!

Though Initial repairs are not able to be claimed outright in the first tax year there is some tax relief. These repairs should be treated as a capital expense. By treating them as a capital expense your will be adding them to the cost base of the property.

We are often asked what is the tax treatment of an initial property repair? Can you claim a tax deduction for a newly acquired rental property investment?

Why the ATO wont allow all repair claims to be treated as an expense.

What is the Government thinking around initial repairs? Why did they decide you just can’t claim the repair outright when you buy the property?

In looking at the intent of the legislation, the lawmakers simply said if you haven’t yet rented the property out yet there is no right to claim an expense on revenue account. Furthermore, the ability for some taxpayers to buy a rundown property and then claim all the expenses in fixing that property up would mean the ATO would be inundated with excessive claims. Hence the initial repairs must be capitalized.

A repair claim should be evaluated on merits. You may find it may not be classified as an” initial repair” simply because it’s the first repair made after you acquired rental your property. The ATO has designed a tool kit and it can be accessed here. Also, you can refer to taxation ruling TR 93/23 where you can read more. It states that A repair is not an ‘initial repair’ simply because it is the first repair made after the property is acquired. The ATO has numerous examples within these two resources.

Repairs that will not be claimed outright can be capitalized. The capitalized repairs are added to the cost base of the Asset. This will assist when calculating the capital gain upon sale as a cost. This means that you can reduce your capital gain at the sale of the property but not claim it against your tax when you acquire the property in the first year.

Here is an example of an ongoing repair that is tax-deductible!

If the dishwasher was working perfectly when you started renting the property but needed repairing a couple of months thereafter, then this would be considered an ongoing repair and tax-deductible.

Repair vs Improvement need help ?

Gartly Advisory looks after many happy clients who own rental properties. Plan carefully and do your homework. The ATO is looking closely at rental property claims as more Australians love to acquire property for investment purposes.

Not sure about what can be claimed upon purchasing your new rental property then reach out to us and we can assist!