The most common question I get is whether money spent on a rental property is repairs or improvements.
The cost of any repairs are tax deductible. However, the cost of improvements are not tax deductible (although depreciation may be claimed if the improvements are a chattel). Due to the significant difference in tax treatment, it is important to understand the difference between repairs and improvements.
The Income Tax Act 2007 only has a vague statement saying that a deduction is not allowed for an amount “to which it is of a capital nature”. Put into my own words, I consider repairs to be costs to reinstate a property to the condition it was in when you purchased that property (not to its original condition).
I have covered this topic in detail from page 23 of my rental guide which can be downloaded by any existing client from the secure area of this website.
Here are some examples:
IRD examples of repairs:
· Replacing a broken shower head
· Plastering & painting a wall crack
· Replacing blown element
· Redecorating to return a property to the state it was when purchased
IRD examples of improvements:
· Substantial improvements to a rundown property
· Adding a conservatory
The IRD also have a policy statement with the following examples:
Repairs - Topping up existing insulation
Improvements - Installing insulation where there was none previously
Repairs - Replacing garage roof with equivalent materials
Repairs - Replacing timber framing from a house extension that was leaking
Improvements - Recladding a leaky house with a superior concrete block system
Improvements - Recladding a leaky building with an equivalent product and replacing building framing
Repairs - Work to maintain an existing retaining wall
Repairs - Deferred work to rejuvenate a property owned for a long time
Improvements - Installing double glazed windows
Improvements - Adding 2 new bedrooms to a house
Improvements - Renovating a newly acquired property
After taking into consideration the tax law and IRD’s views, we generally treat minor renovations as repairs. We treat bathroom and kitchen renovations as repairs if the property has been owned for a reasonable period of time.
However, if substantial work is done to a property just after it is purchased, then that’s likely to be improvements. I do recommend that you delay such work for a year or so if you can in order to better justify claiming those costs as repairs rather than improvements.
Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.