Rental property investments are very popular in Australia with over 1.8 million individuals (8% of the Australian population) reporting to the ATO as having an investment property. Two out of three investors, or 1.2 million of these individuals, were negatively geared and reported a loss on their rental property.
A landlord is entitled to claim a deduction for rental property repairs that relate to defects, damage or deterioration arising from the use of the property for income-producing purposes.
A repair for tax purposes is the replacement or renewal of a worn out or damaged part of something, but not the whole thing. For example, replacing some sheets of iron on the roof is a repair. In contrast, replacing the whole roof is not a repair for tax purposes and deemed to be capital (see TR 97/23).
A deduction is not available for any part of a repair expense that relates to defects, damage or deterioration in existence at the time the property was acquired. These are known as ‘initial repairs’ and are considered part of the cost of acquiring the property so are capital in nature.
Where repair expenditure is incurred after a rental property ceases to be used for income producing purposes (i.e. the property becomes the taxpayer’s main residence), then the expenditure may still be deductible if:
- The necessity for the repairs relates to a period during which the property was used for income-producing purposes, and
- The expenditure is incurred in a year the property was used for income-producing purposes.