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

Initial Repair must be capitalised!

Though Initial repair cannot be claimed outright in the first tax year, there is some tax relief. These repairs should be treated as a capital expense. Treating them as a capital expense will add them to the property’s cost base.

We are often asked what the tax treatment of an initial property repair is. Can you claim a tax deduction for repairs to a newly acquired rental property investment? Will the ATO allow it!

Why won’t the ATO treat all repair claims as an expense?

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

In looking at the intent of the legislation, the lawmakers said if you haven’t yet rented the property out 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 a rental property. The ATO has designed a tool kit, which can be accessed here. Also, you can refer to taxation ruling TR 93/23 where you can read more. The ruling outlines 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.

Examples of an initial repair

Here are some initial repair examples:

Fixing a Damaged Roof: If the rental property’s roof was damaged or leaking at the time of purchase.

Replacing Broken Windows: If any windows were broken or dysfunctional when the property was bought, their replacement is categorized as an initial repair.

Repairing Electrical Systems: If the electrical systems, like wiring or electrical appliances, were not functioning correctly at the time of purchase. Therefore, any repairs to make them operational would be considered initial.

Plumbing Repairs: Fixing any pre-existing issues with the plumbing system, such as leaking pipes or faulty plumbing fixtures, is classified as an initial repair.

Restoring Damaged Flooring: This includes repairing or replacing floorboards, tiles, or carpets that were in poor condition when the property was acquired.

Repairs that are regarded as initial cannot be claimed outright and must 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 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 worked perfectly when you started renting the property but needed repairing a couple of months thereafter. 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.

Unsure what can be claimed upon purchasing your new rental property, reach out to us, and we can assist!