From negative gearing concessions to depreciation of your investment property, there are several ways for you to reduce your annual tax bill. 

A smart property investor knows how to maximise tax reliefs on their real estate to save plenty of money at tax time. So when you (or your accountant) are getting ready to lodge your tax return, you want to make sure that you consider other factors such as repairs or improvements that you have made on your income-generating property. 

 To make sure you won’t miss out on any tax breaks, read on to learn what types of investment property renovations are tax deductible. 

Repairs and maintenance 

For rental properties, the Australian Taxation Office (ATO) allows you to either claim or offset the cost of two categories of upkeep on your investment property: repairs and maintenance. 

Repairs

Repairs generally involve any work you carry out on your property to return it to its original state or function.To meet ATO guidelines for tax deductions, the work you carry out must replace, renew or fix any damage or deterioration of the property. For instance, if a power line falls on your property, you have to replace the fence using the same materials as the original to restore it to its original state before the damage occurred. If you used another material for your repairs, this is considered an improvement and will be treated differently by ATO. 

Your expenditure for repairs is tax deductible, but only if it directly relates to the wear and tear and other damage that occurred under the following scenarios:

• when it is generating income on an ongoing basis; or 
• the property remains available for rental or other income-producing purposes but there is a short period when the property is unoccupied. For example, where unseasonable weather causes cancellations of bookings or advertising can’t attract tenants.

The cost of repairs on the property may also be deductible where the expenditure is incurred in a year of income that the property is held for income-producing purposes, even though the property has previously been held by you for private purposes (e.g. private residence). You can also claim for some or all of the damage attributable to when the property was used for private purposes.

If you are no longer using the property for income-generating purposes, the cost of repairs may still be deductible given that:

• the need for the repairs is directly related to the period in which the property was used by you to produce income
• the property was income-producing during the tax year in which you incurred the expenses of the repairs.

But remember that any repairs on defects that existed when you obtained the property are not tax deductible if they are carried out before the property is used to generate income. This applies even if the repairs were carried out to prepare the property for tenant occupation. Also, if you have to replace an item, this is not categorised by the ATO as a repair. While you may not be able to claim the entire replacement cost, you can still claim it as capital works or a depreciating asset, which will be discussed later. 

Maintenance

If you had any work carried out to prevent or fix any existing deterioration on your investment property, this is considered as maintenance. It is considered as tax deductible by the ATO. This includes the cost of painting, cleaning and maintaining the plumbing or gardening. If work to prevent or fix the deterioration occurs as a direct result of the property being used to generate income, you can claim deductions for the tax year in which it happened. 

Improvements 

While a repair refers to any activity done to restore a property to its original state, an improvement can be anything considered to make the property more valuable or more desirable. If you also change the character on the item on which works are being carried out, it will not be tax deductible.

For example, if a tenant complained that their stove top oven that came with the rental property is not working. If you (as an owner) decide to replace the stove top oven with a bigger, more energy-efficient and newer model, it is considered as an improvement and the cost involved in its replacement cannot be claimed as a deduction. 

What property improvements can give me tax benefits? 

Generally, you are not allowed to claim a deduction for the total cost of improvements in the year that you carry them out. This might make you wary of spending to improve your investment property. You might even find yourself asking if the returns are worth the effort. 

But don’t worry! Improvements done on a property can still give you tax reliefs over time. These are divided into two categories: deductions for depreciation and capital works deductions. 

Depreciation 

Under ATO guidelines, tax deductions for depreciation are applicable to assets within the investment property that decline in value over time. The ATO provides a list of assets that are assumed to have a limited effective life on their website. 

To learn more about depreciation claims you can make on your investment property, read here. 

Capital works deductions

Building construction costs, expenses that went into changing a building or the cost of capital improvements to the surrounding area of the property are included in tax deductions for capital works. 

To learn more about capital works expenditures you can claim on your investment, read here. 

Conclusion 

Before you make any renovation on your property, it is important to consider the effects that the makeover can have on your financial status. And if you have any of these expenses to claim, make sure that you have everything well documented and recorded. As with any tax matter, it is best to consult with your accountant or solicitor on how you should proceed with these claims when tax time comes.