Major Repair Costs Can Still Be Deductible

A recent case has shed light on how substantial expenses related to rental property repairs can still be classified as deductible, provided there is sufficient documentation and a clear understanding of tax law.

In August 2022, a rental property in Canberra became uninhabitable after a leaking roof led to worsening damage with every rainfall. Upon inspection, builders discovered that the water damage had severely compromised the structure’s wooden roof supports.

The property’s owners spent nine months and $138,000 on repairs, facing delays due to shortage of available tradespeople. Despite the significant cost, the expenditure was ultimately accepted as a deductible repair rather than a capital improvement under current rental property tax rules.

Typically, repair and maintenance costs can be fully deducted in the financial year in which they occur. However, capital works – such as those that improve or replace an entire structure – are subject to different, often less favourable, tax treatment.

The case challenged a common misconception: that large repair bills automatically fall into the capital expense category and therefore are not immediately deductible. Instead, it was successfully argued that the work restored the property to its original condition without enhancing its value or functionality.

The owner’s tax advisers anticipated an audit by the Australian Taxation Office (ATO) and prepared a defensible position in advance. As expected, the ATO did investigate and initially rejected the deductions, citing structural enhancements. However, after a formal objection clarified that only the damaged areas were reinforced – without extending the property’s life or value – the deductions were accepted in full.

The case highlights the importance of both documentation and professional advice when navigating complex areas of tax law. Tax professionals are encouraged to seek second opinions when unsure and to educate clients on the nuances of repair versus capital expenditure.

Large property expenses don’t automatically mean you’ll miss out on deductions. With the right documentation and a clear understanding of the rules, even substantial repair costs may be fully deductible.

Contact the team at Lockwood Partners to review your rental property expenses and make sure you’re not leaving money on the table.