Close this search box.
BIS Cosgrove Accountants Gold Coast & Brisbane

Rental Property Improvements vs. Repairs: Tax Rules You Need to Know

repairs vs improvements

A rental property can be a great investment. It’s a chance to expand your financial portfolio and generate income. Some landlords try to take advantage of the tax system by mislabeling any changes or updates they make to the property. While this could lead to some immediate tax breaks, it can also cause big trouble later.

The ATO’s Definition of Improvement

The Australian Tax Office (ATO) has focused its attention on investment properties that have been recently repaired. Some property owners have found that if they buy a property and make “initial repairs” on it, they can deduct the expense incurred from those repairs. That sounds straightforward until you compare the ATO’s definition of “repair” with what was actually done.

In many cases, the property owner will make vast improvements to the property. These are upgrades that could increase the value of the home or building. Improvements are not tax deductible, but some think that labelling them as repairs will let them fly under the ATO’s radar.

The ATO has a specific definition of what is considered a repair and eligible for a tax deduction. If something is actually an improvement, then it will have:

  • Replaced or renewed a major part of the property’s structure
  • Replaced a thing with something new and better than the previous component
  • Replaced a feature or thing with a new version that offers far more advantages than the old one, including reduced future repair bills
  • Work that was performed exceeded the need for restoration of function

Anything that fits any of the above criteria cannot be deducted. There are some projects that may fall into a grey area, making it hard to determine if the ATO will view it as a repair or an improvement.

Know Your Tax Obligations Before Making Repairs or Improvements

Before you begin a repair or improvement on a rental property, make sure you understand your tax obligations. This is especially important if the savings is a driving force in your decision to do the work. An expert can help you decide whether you will receive any tax benefits from the project. They can also help ensure that you don’t wind up with a penalty later should the ATO decide that you misrepresented the finished work.

Start every repair or improvement project by contacting BIS Cosgrove. Learn more about your options when it comes to paying taxes on rental properties. Brian and the team are available to answer questions and help you get the most out of your rental investment.