Our friends at Capital Claims Tax Depreciation are taking over the blog this week for an easy-to-understand explanation of the difference between capital improvements vs repairs and maintenance.
If you find yourself getting confused between the two, then here’s what you need to know:
Difference Between Repairs & Maintenance Vs Capital Improvements
Investors often confuse repairs and maintenance with capital improvements. Both are legitimate tax deductions, but they’re treated differently when recording your deductions for tax purposes each year.
Repairs & Maintenance
Repairs and maintenance for your residential property means repairing or servicing an asset with the purpose of keeping it in the same condition as when it was purchased. Basically, any alterations done to a property to keep/restore its original condition is considered repairs and maintenance.
What Counts As Repairs and Maintenance?
Examples include repairs made to an oven, a wall, leaks fixed in a ceiling by repairing part of the roof, or replacement of fence palings or single panels of a broken fence. Repairs and maintenance costs can be claimed in whole in the year the cost is incurred (the year you paid for the repair).
In a business setting, repairs and maintenance can count as a company’s operational expenses. For example, if a company car or delivery truck has suffered damage in an accident, then the expense to repair the asset is considered under repairs and maintenance.
Capital improvements
The best way to think about capital improvements is that they are a permanent repair or structural alteration to an existing property for the purpose of increasing the overall value of the property. The most common situations include wanting to extend the life of a property, upgrading before selling or requiring upgrades to suit the owner’s/occupant’s specific needs.
Basically, any alterations done to a property to put it in a better/improved condition, beyond the condition of the asset at purchase, is considered a capital improvement.
What Counts As Capital Improvements?
Examples of capital improvements include things like replacing a roof, repairing the whole house, replacing walls, adding rooms, replacing fences, repainting, or replacing assets such as ovens, cooktops, range-hoods, blinds and carpets.
What Are Depreciating Assets?
Depreciating assets for a residential property that cost less than $300 (eg. exhaust fan, bathroom accessories, smoke alarm) can be claimed in full, in the financial year in which the item was purchased and installed.
Capital improvements and additions that cost in excess of $300 must be depreciated over time, which means only a portion of the expense can be depreciated in the year of purchase, and the balance is claimable proportionally each year for the effective life of the asset.
For example, a new tile roof installed on the 1st of July, for a cost of $20,000, has an effective life of 40 years and will depreciate at 2.5% per annum.
Commercial properties are treated differently again, however, the Capital Claims Tax Depreciation’s recent article on refurbishing business spaces provides more information.
The Take Away
Regardless of the type, if you own an investment property, the best way to ensure your depreciation deductions have been maximised is to use a depreciation schedule. You can read CCTD’s article covering a depreciation schedule for more information.
If you’re not sure about which deductions you might be entitled to, don’t hesitate to give the Capital Claims Tax Depreciation team a buzz for an estimate. They can also review your current depreciation schedule reviewed free of charge. Sound good? Get in touch with us or call 1300 922 220 to speak to one of our friendly team members today.
