Repairs, Maintenance vs Capital Improvements: A Guide for Property Investors

As a property investor, understanding the difference between repairs, maintenance, and capital improvements is crucial, not only to meet your tax obligations but also to maximise your deductions effectively. These categories may sound similar on the surface, but they are treated differently for tax purposes. This blog aims to unpack these concepts, providing clarity on each and actionable insights for investors.

The Tax Difference: Repairs/Maintenance vs Capital Improvements

• Repairs and maintenance expenses are immediately deductible, meaning you can claim the full cost in the tax year the expense was incurred.

  
  

• Capital improvements, however, must be depreciated over time. This involves claiming a portion of the expense each year over the effective life of the improvement, as outlined by the Australian Taxation Office (ATO).

Ensuring you accurately categorise these costs can prevent errors in your tax return and help you optimise your deductions. Below, we delve into what falls under repairs, maintenance, and capital improvements so you can determine how to record these expenses.

What Is Considered a "Repair"?

Repairs are focused on restoring an asset to its original condition or fixing damage without improving its functionality or value beyond its original state.

Examples of Repairs:

• Fixing a broken oven door

• Repairing a hole in the wall

• Resealing a leaking bathtub

• Replacing broken window glass

• Fixing cracked roof tiles

Tax Benefit: Repair costs are fully deductible in the year they are incurred.

What Is Considered "Maintenance"?

Maintenance refers to tasks that aim to preserve the property, prevent deterioration, or ensure assets remain functional.

Examples of Maintenance:

• Repainting walls to cover marks or wear and tear

• Restaining decks to prevent weather damage

• Pool cleaning

• Lawn mowing and gardening upkeep

• Pest control

Tax Benefit: Like repairs, maintenance expenses can be fully deducted in the year they are incurred—but only if the property is income-producing.

What Is a Capital Improvement?

Capital improvements go beyond repairs and maintenance by significantly upgrading or enhancing the property. These improvements add value to the property or extend its useful life.

Examples of Capital Improvements:

• Installing a brand-new tile roof

• Replacing a damaged fence with new material

• Repairing the foundation of the house

• Adding rooms or extensions

• Updating major appliances like ovens and rangehoods

• Fully painting the property’s interior or exterior

Capital improvements often involve large-scale changes critical to the property's long-term value.

Tax Treatment for Capital Improvements

Unlike repairs or maintenance, capital improvements are depreciated over their effective life rather than being claimed immediately.

The Two Depreciation Categories:

1. Capital Works Deductions (Division 43):

   Includes structural elements like bricks, tiles, flooring, and window frames. These typically depreciate at 2.5% per year over an effective life of 40 years (for properties built after 15/07/1987).

2. Plant and Equipment Depreciation (Division 40):

   Removable fixtures include blinds, carpets, air conditioners, ovens, and light fittings. Each item has its own depreciation rate and effective life, as determined by the ATO.

Example of Capital Improvement Depreciation

Let’s say you install a new roof costing $20,000 on 1 July. The roof has an effective life of 40 years. You can claim 2.5% depreciation annually ($500 annually) until the cost is fully depreciated.

For smaller assets costing less than $300 (e.g., exhaust fans, bathroom accessories), you can claim the amount in full in the year of purchase and installation.

How do you determine whether it is repair, maintenance, or capital improvement?

When assessing a project, ask yourself:

1. Does the work restore functionality or fix damage?

   If yes, it’s likely a repair.

2. Is the work part of regular upkeep to prevent deterioration?

   If yes, it’s maintenance.

3. Does the work improve, upgrade, or extend the property’s life beyond its original condition?

   If yes, it’s a capital improvement.

Common Questions

Is Painting a Repair, Maintenance, or Capital Improvement?

It depends.

• Repair: Patching a hole in the wall and repainting over it.

• Capital Improvement: Painting the entire interior or exterior for aesthetic or value-adding reasons.

Can I Claim Depreciation for Commercial Properties?

Yes. Owners and lessees of commercial properties can claim tax depreciation for both:

• The building itself (Division 43)

• Plant and equipment assets (Division 40)

If refurbishments like renovations are completed, accelerated deductions may be available.

2017 Updates to Residential Depreciation Rules

Legislation changes in 2017 impacted depreciation claims for property investors, restricting claims on second-hand plant and equipment assets. Despite this, residential property owners can still benefit from:

• New plant and equipment assets installed in the property, such as ovens or dishwashers.

• Capital works deductions typically make up 85–90% of the total claimable depreciation.
  

The Importance of a Depreciation Schedule

A Tax Depreciation Schedule is vital for maximising your property investment deductions. It offers a comprehensive breakdown of all claimable depreciation across your property's lifetime and is fully tax-deductible. To ensure accuracy and maximise your deductions for capital improvements and plant/equipment depreciation, we recommend engaging a qualified quantity surveyor to prepare a detailed depreciation schedule tailored to your property.

Claiming Deductions with Confidence

Whether you're dealing with repairs, maintenance, or capital improvements, knowing how to categorise these expenses is essential for tax compliance and maximising deductions.

I'm always here if you need guidance or have questions; click here to book a time that works for you, or feel free to call me on 0439 030 850.

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Tim Goode

Managing Director | Ignite Accountants