Repairs and maintenance are a fact of life for rental property owners. As a property investor yourself, you’d be well aware of this. You’ll also be aware that you can reduce tax through any repairs or maintenance you carry out. On the other hand, there are no tax breaks when you carry out improvements to your rental property. And this is where cold hard facts become murky matters of conjecture.
Knowing the difference between maintenance and repairs, and improvements, is not always an easy distinction to make. Even the IRD concede this. Their website points to several examples where the line between repair and improvement is a fine one. In one instance relating to leaky homes, the IRD says:
Replacing timber framing from a house extension that was leaking is considered to be a repair.
Recladding a leaky house with a superior concrete block system is considered to be an improvement.
You could argue that recladding with a concrete block system might be considered a repair. You’d be arguing that against the IRD (which we don’t advise you do!). That’s why it is important to get expert advice on the distinction between repairs and maintenance, and improvements.
As a property investor, claiming on repairs and maintenance is a huge deal for you. After all, repairs and maintenance are probably your largest cost after interest when owning a rental property. In a perfect world, you’d treat as much expenditure as you could as repairs and maintenance. That way, a full deduction in the year that expenditure is incurred can be claimed.
On the other hand, capital improvements are of no immediate or future tax benefit to you. They become "capitalised" and added to the value of the building which, following law changes in 2011, is no longer depreciated.
Again, we need to know the difference between repairs and maintenance, and improvements. It’s a fuzzy one. Take a scenario where a tenancy ceases and you decide to get the place ready for sale. When a property is no longer available for rent, investment expenses cannot be deducted. So, the costs you incur when getting a house ready for sale are considered improvement costs rather than repair and maintenance costs.
But what if you own an older rental property and decide to do up a bathroom that has seen better days? Theoretically, that could be a repair AND an improvement. And how do you judge a new coat of paint both inside and out? Well, the IRD says that redecorating to return a property to the condition it was in at time of purchase is a repair. Good news for you, and for your tenants who will enjoy the improvement in appearance
On the other hand, knocking down a wall to create open plan living is an improvement. So is double glazing. Or a new bedroom. Basically, anything that changes the character of a property could be considered an improvement. While anything done to fix up wear and tear could be considered a repair. But, as you would have guessed by now, not everything is that clear cut.
Let’s look at replacing a roof as an obvious example. It might be an old roof and in dire need of repair. And when you replace it with similar materials, then a repair is what you’ve made. That means, you can claim it as such for tax purposes. However, if you replace the roof with a different product, and most likely a superior one, then you’ve made an improvement. The tax benefit to you adds up to exactly nothing.
Knowing the difference between repairs and maintenance and improvements can be tricky so we like to help. To start with, email us at firstname.lastname@example.org or email@example.com and ask for a Quick Claims guide. This guide will reveal what you can claim for on your rental property. For more detailed information, get in touch and we’ll book in a chat.
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