Improvements, Repairs and Maintenance: The Complete Guide On Claiming on Your Investment Property

Improvements, repairs, and maintenance. All sound similar but are treated differently by the Australian Tax Office (ATO). When you buy an investment property, particularly a second-hand property, you’ll quickly find out that there are all sorts of costs that you’ll incur when renting out your investment property. 

A key aspect to consider is the tenancy agreement, which outlines the responsibilities and obligations of both landlords and tenants, particularly regarding repairs and maintenance. 

In general, first-time investors who aren’t equipped with the necessary tax knowledge will either miss the opportunity to claim their repairs and maintenance expenses or confuse what constitutes improvements, repairs, and maintenance when completing their annual tax return. 

In a recent review, the ATO indicated that at least 9 out of 10 property investors were making mistakes on their claims, with claiming expenses on rental properties as one of the top 5 mistakes commonly made during tax time. 

So, we’ve created a guide that’ll help you distinguish between the types of deductions available for repairs and maintenance, including when and how to claim this for the best tax benefits. 

What’s The Difference Between Repairs, Maintenance and Improvements? 

Before indicating what you can and can’t claim, it’s essential to understand what constitutes repairs, maintenance, and improvements. Repairs related to rental properties address defects or damage resulting from normal wear and tear and are essential for maintaining the property. 

What’s Considered A Repair? 

According to the ATO, repairing your rental property entails remedying some kind of defect or damage to your property. In other words, repairs relate to the general wear and tear of the rental property and any damage caused to the property as a direct result of renting it out. 

It is important to distinguish between urgent and non-urgent repairs. Non-urgent repairs are those that do not pose an immediate risk to the safety or security of the property and must be completed within 14 days of notification, with landlord consent required before undertaking such repairs. 

Examples of repairs include: 

• Replacing roof tiles that were damaged in a storm 

• Repairing a broken air conditioner 

• Replacing a broken window 

• Resealing a leaking bathtub 

What Constitutes as Maintenance? 

The ATO defines maintenance as any work carried out to prevent the investment property’s deterioration or to fix existing damage. 

Examples of maintenance include: 

• Pest control 

• Painting 

• Cleaning 

• Gardening and land maintenance. 

A non-urgent repair might include fixing a leaky tap, repairing a broken fence, or addressing minor electrical issues. 

What About Capital Improvements? 

While a repair restores something to its original state and maintenance prevents the property from deteriorating, an improvement upgrades and advances your investment property. The purpose of improving your rental property is to increase its market value or increase its ability to generate income. 

It’s important to consider the financial implications of these improvements, including the reasonable costs associated with them. 

Examples of improvements include: 

• Remodeling the kitchen so that the area is bigger and more open; 

• Extending the size of the bedrooms; 

• Adding a swimming pool and patio area 

What Can You Claim on Your Rental Property? 

You can claim the expenses related to the repairs and maintenance of your investment property as an immediate tax deduction. In other words, you can claim these expenses in the same year you paid them. It’s important to note that the claim for repairs and maintenance needs to have occurred during the period you rented it out. 

To claim these expenses, you must provide a written notice to your landlord detailing the repairs and maintenance required. This formal notification ensures that there is a clear record of communication and can be crucial for urgent repairs or when the landlord is required to repay costs. 

Example 1: 

Serena owns an investment property in Port Douglas, Queensland. To generate income from her property, she is currently renting it out. 

In March 2024, her tenants called her to let her know that there was a severe storm over the weekend. There were a few roof tiles that were damaged as a result of the strong winds. 

In such situations, renters need to notify their property manager about any necessary repairs. The property manager is responsible for organising and paying for these repairs, especially when they are not caused by the renter. 

Serena called a local repairer to inspect the damage. After receiving his quote, Serena decided to go ahead with the repair. 

Serena can claim that repair expense incurred on her 2024 income tax return. 

Capital Expenses and Depreciation 

Capital expenses are costs associated with acquiring or improving a rental property. Unlike repair expenses, which can be claimed immediately, capital expenses are not immediately deductible. Instead, they can be claimed over time through depreciation. Depreciation represents the decrease in value of an asset over its useful life, allowing landlords to spread the cost of the asset over several years. 

Examples of capital expenses include: 

• Purchasing a rental property 

• Constructing a new building or renovating an existing one 

• Installing new fixtures and fittings, such as kitchen appliances or bathroom fixtures 

• Upgrading the electrical or plumbing systems 

To claim depreciation, you need to keep detailed records of the cost of the asset, its useful life, and the method of depreciation used. The two primary methods for calculating depreciation are the diminishing value method and the prime cost method. By maintaining accurate records and choosing the appropriate depreciation method, you can maximise your tax benefits over time. cords and choosing the appropriate depreciation method, you can maximise your tax benefits over time.

What Can’t You Claim on Your Investment Property?

What Can’t You Claim on Your Investment Property Immediately? 

You can’t claim expenditure for repairing damage that existed when the property was purchased (whether it was known about at the time of purchase or not). This is known as Initial Repairs. 

A landlord agrees to cover repairs only if the damage occurs after the property has been rented out and is not due to tenant negligence. 

Urgent Repairs 

Urgent repairs are essential to prevent further damage to the rental property or to ensure the health and safety of the tenants. These repairs need to be addressed immediately to avoid potential hazards or significant property damage. 

For example, suppose you undertook a repair upon acquiring an investment property. In that case, it will be considered an initial repair and not deductible as repairs and maintenance. 

Initial repairs involve remedying defects or damage that existed when you purchased the investment property before renting it out. These repairs related to addressing defects or damage resulting from normal wear and tear are treated as improvements and would have to be classified as Capital Expenses under ‘Capital Works’ or ‘Plant & Equipment,’ depending on the expenditure. 

Once the property is used for investment purposes, you can claim depreciation on these expenses. 

Capital expenses may also form part of your property’s cost base for capital gains tax (CGT) purposes. By maximising your cost base, you should be able to minimise capital gain once you sell the property: less capital gain means less CGT. 

Landlords are responsible for carrying out urgent repairs as soon as possible. If you don’t address these issues right away, tenants may have the right to arrange for the repairs themselves and claim the cost from you.  

Ensuring that urgent repairs are handled swiftly not only maintains the property’s condition but also upholds your legal obligations and keeps your tenants safe. 

Example 2: 

Wendy purchased her first investment property in 2018 but it was run-down. Before she could advertise it for rent, she needed to: 

• fix a leaking bath; 

• replace the shower; 

• repair an air conditioner; 

• clean; and 

• repaint all interior/exterior walls. 

It is important to document these initial repairs with a written notice to ensure there is a formal record of the work done and any communications with contractors or landlords. 

Since all these works were performed before renting out her property, they are considered initial costs and cannot be claimed as immediate deductions but may contribute to her cost base for depreciation purposes. 

Improvements 

An improvement is a renovation that makes an aspect of your property better or more valuable or changes its character. Improvements can be classified under capital works (capital improvements) or plant & equipment (depreciable assets). 

When making improvements, it’s important to consider the reasonable costs involved. These are costs deemed fair by most people and can include expenses for urgent repairs, which landlords may be obligated to cover, provided there is written notice and documentation. 

According to updated ATO guidelines, improvements are classified as capital works deductions at 2.5% per year over 40 years, provided detailed records are maintained about dates and costs incurred. 

Example 3: 

Joseph rents out his Cronulla investment property in NSW. His tenants damaged a cement wall separating two rooms. Joseph decided not just to repair but replace it with a brick feature wall—an improvement rather than repair work. A landlord agrees to such improvements typically when they enhance the property’s value or functionality. He cannot claim this cost immediately but can depreciate it under capital works deductions over time. 

Replacements 

If an item in your rental breaks beyond repair—for example, replacing an old bathtub—the ATO considers this replacement as either capital improvement or depreciable asset acquisition, not immediate repair work.  

Repairs related to defects or damage resulting from normal wear and tear are essential for maintaining the property. From 2024 onwards, replacements must now be reported under specific asset categories in tax returns for compliance with new reporting standards. 

Efficient Replacements and Upgrades 

When it comes to replacing or upgrading fixtures and fittings in a rental property, opting for energy-efficient and water-efficient options can be highly beneficial. These upgrades not only reduce the property’s environmental impact but also lead to significant savings on utility bills over time. 

Examples of efficient replacements and upgrades include: 

• Installing low-flow showerheads and toilets 

• Replacing incandescent light bulbs with LED bulbs 

• Upgrading to energy-efficient appliances 

• Installing solar panels or a solar hot water system 

The cost of these replacements and upgrades can be claimed as a capital expense and depreciated over time. Investing in sustainable options enhances the property’s value and appeal while benefiting from long-term cost savings. 

Safety and Security 

As a landlord, ensuring the safety and security of your rental property is paramount. This responsibility includes implementing measures that protect tenants and maintain the property’s integrity. 

Key safety and security measures include: 

• Installing smoke alarms and ensuring they are working properly 

• Providing a safe and secure entry system 

• Ensuring the property is well-maintained and free from hazards 

• Providing adequate lighting and security measures 

The costs associated with these safety and security measures can be claimed as capital expenses and depreciated over time. By prioritising safety and security, you not only comply with legal requirements but also create a secure living environment for your tenants. 

Smoke Alarms and Safety Features 

Smoke alarms are a critical safety feature in any rental property. Legally, landlords are required to install working smoke alarms in all rental properties. The cost of installing smoke alarms and other safety features can be claimed as a capital expense and depreciated over time. 

Examples of safety features you can claim as a capital expense include: 

• Smoke alarms 

• Carbon monoxide detectors 

• Security cameras 

• Alarm systems 

Keeping detailed records of the costs associated with these safety features is essential. By doing so, you can claim them as capital expenses on your tax return, ensuring that you maximise your tax benefits while maintaining a safe and secure rental property.  

Key Takeaways 

Replacements of items are not considered repairs but are classified as capital improvements or depreciable assets. 

• From 2024 onwards, replacements must be reported under specific asset categories in tax returns. 

• Improvements are classified under capital works (e.g., structural upgrades) or plant & equipment (e.g., depreciable assets). 

• Improvements are not immediately deductible but can be claimed over time as tax depreciation. 

• To claim repairs and maintenance as an immediate tax-deductible expense, the costs must directly relate to general wear and tear of your investment property. 

• Any damages incurred from renting out the property qualify for immediate deduction.

Unlike repairs and maintenance, improvements are not an immediately claimable expense, but you can claim a percentage of the cost over time as tax depreciation by engaging a Quantity Surveyor.