Renovation Tax Deductions for a Rental Property
Renovating a rental property can be an expensive and time consuming business but the good news is that many of the costs you incur can be claimed as a tax deduction, reducing your tax bill for the financial year you undertake the work.
That’s the good news; the bad news is that the ATO have investment property owners on their radar this year so if you decide to spruce up your property, its essential to make sure that you treat your expenses correctly.
Broadly speaking, any work you do to renovate your rental property will be tax deductible straight away or will qualify as an improvement, which is an item of capital expenditure that will need to be written off over time.
Note also that if you have just acquired your investment property and the work you are looking at doing relates to fixing defects that existed when you purchased the property, the costs you incur will be automatically capitalised and not deductible straight away, even if the type of work you are doing would normally be deductible as a repair.
So what are the rules?
In simple terms, you can claim a deduction for the expenses that relate to your property for the period your property is rented or is available for rent. That can include periods that the property is vacant between tenants (which is important, because major renovations will often occur after a tenant has moved out and before another one moves in).
Essentially the same rules apply regardless of whether the property is available for short-term letting (for instance through a website like Airbnb) or is let to long term tenants.
Items that can potentially be claimed straight away against your current year’s rental income include:
- Repairs to make good or remedy defects in, damage to or deterioration of the property
- Management and maintenance costs, such as advertising, body corporate fees and charges, cleaning, council rates, water charges, land tax, gardening, pest control, insurance (building, contents, public liability)
- Interest on your bank loans and borrowing expenses
Major property renovations, such as remodelling a bathroom, are classed as capital improvements by the ATO and are either depreciated over the lift of the asset or claimed as capital works deductions. Either way, these cannot be claimed straight away so you’ll be looking at spreading the cost over several years, or even decades.
Deductions for construction or renovations can include:
- Building an extension, garage, patio or pergola
- Landscaping the property including installing things like swimming pools, water features, etc
- Internal alterations, like removing an internal wall
- Structural improvements like adding a carport or retaining wall
- Architect or surveyors fees
- The cost of building permits
Capital works deductions are available in relation to work done to the investment property itself at the rate of 2.5% or 4%. Your total claim over that period can't exceed your expenditure and cannot be claimed until your job is complete. You can also only claim such expenses for the period the property is rented.
For separately identifiable assets within the property – such as ovens, heaters, air conditioners and hot water heaters- the cost is depreciated over the life of the asset. A full list of the effective life of assets typically found within rental properties can be found on the ATO website here:
It can be useful to contact a quantity surveyor to determine the building costs and prepare a depreciation schedules for the rental property. They will help determine what can be claimed and their fee is tax deductable.
If you get a builder in to do work that consists of both repairs and improvements at the same time, the ATO recommends you separate these costs. Asking your builder or tradie to produce an itemised invoice can help you work out your claim. If you don’t get an itemised invoice, all the expenditure will need to be treated as capital and written off over time.