As the property market continues to strengthen and many look to property as a way to invest, it is important to consider the tax implications including the deductibility of costs associated. One area commonly misinterpreted is initial costs to repair, replace or improve parts of the property.
Although we would all love to purchase new, customised houses, a lot of the time this is not feasible and may have less value for investment purposes. With this in mind we go to inspections identifying what we would change. Unfortunately if you purchase an investment property and remedy defects, damage or deterioration which existed at the date of acquisition, these costs are considered ‘initial repairs’ and are not tax deductible.
There are people that may tell you to wait until you rent it out, and any repairs completed after will be deductible. This is a misconception as the issues already existed when the property was purchased, did not fully relate to the period of ownership where you received rent and will therefore be non-deductible. You may however claim an apportionment of the costs based on your holding period. With investment properties in the sights of the ATO, it is important to ensure you’re correctly claiming your deductions as it can adversely affect your cash flow and tax.
By Ivan Ng