Tax treatment of maintenance costs prior to renting - how to capitalise?

[BLTN]

Hi SSers,

So I've been doing some research on the tax treatment of maintenance costs (e.g. painting, cleaning carpets etc) on an IP prior to renting (i.e. you buy a dilapidated house and restore it to original condition).

The ATO says the following:

Can you claim the cost of repairs you make before you rent out the property?

You cannot claim the cost of repairing defects, damage or deterioration that existed when you obtained the property, even if you carried out these repairs to make the property suitable for renting. This is because these expenses relate to the period before the property became an income-producing property.

It goes on to say that these are capital expenses. However, it does not clarify how to capitalise these expenses (it talks more about genuine capital expenses such as building a new kitchen or adding new structures).

Surely one is not going to depreciate the cost of paint over 40 years... But it also seems pretty lousy if the costs are just added to the cost base.

Anyone have any clarity on this?

 

[depreciator]

Surely one is not going to depreciate the cost of paint over 40 years... But it also seems pretty lousy if the costs are just added to the cost base.


The ATO class this stuff as 'initial repairs' i.e. stuff done before a place is rented out.
Most people depreciate these 'improvements'.
Yep, paint is claimed over 40 years if it is done as an 'improvement'.

 

[Paul@PFI]

Hi SSers,

So I've been doing some research on the tax treatment of maintenance costs (e.g. painting, cleaning carpets etc) on an IP prior to renting (i.e. you buy a dilapidated house and restore it to original condition).

The ATO says the following:

Can you claim the cost of repairs you make before you rent out the property?

You cannot claim the cost of repairing defects, damage or deterioration that existed when you obtained the property, even if you carried out these repairs to make the property suitable for renting. This is because these expenses relate to the period before the property became an income-producing property.

It goes on to say that these are capital expenses. However, it does not clarify how to capitalise these expenses (it talks more about genuine capital expenses such as building a new kitchen or adding new structures).

Surely one is not going to depreciate the cost of paint over 40 years... But it also seems pretty lousy if the costs are just added to the cost base.

Anyone have any clarity on this?

Actually Depreciator sums it up well but you have three options:
1. Capex and cost is deferred until sale. Based on 50% CGT discount you lose half.
2. Improvements over 40 years.
3. False claim in tax return with risk of repayment, penalties and interest + exposure to risk of criminal charges in its worst form.

There is a fourth option- Buy a place that has already had improvements. Nothing to spend. But then it will cost more !! That the general principal behind initial repairs being non-deductible. Otherwise every investor would buy a shiteh%le and deduct away until it looked like Sadam's palace.

 

[BLTN]

Surely one is not going to depreciate the cost of paint over 40 years... But it also seems pretty lousy if the costs are just added to the cost base.


The ATO class this stuff as 'initial repairs' i.e. stuff done before a place is rented out.
Most people depreciate these 'improvements'.
Yep, paint is claimed over 40 years if it is done as an 'improvement'.

If that's the case, wouldn't you be better off not even claiming it at that point, and rather getting a depreciation report done after the 'improvements' are all complete and depreciating at the respective rates then?

I haven't looked into the depreciation yet (it's next on my to do list), but I'm assuming that paint is expected to depreciate in far less than 40 years.

It's a bit disappointing that you can't get a tax deduction for maintenance costs like this. Seems the best strategy is to rent it out initially (if you can), then either perform the renos while the tenant is there (if possible) or between getting new tenants.

 

[BLTN]

Actually Depreciator sums it up well but you have three options:
1. Capex and cost is deferred until sale. Based on 50% CGT discount you lose half.
2. Improvements over 40 years.
3. False claim in tax return with risk of repayment, penalties and interest + exposure to risk of criminal charges in its worst form.

There is a fourth option- Buy a place that has already had improvements. Nothing to spend. But then it will cost more !! That the general principal behind initial repairs being non-deductible. Otherwise every investor would buy a shiteh%le and deduct away until it looked like Sadam's palace.

Thanks for this. Yes, 3 is not an option haha.

Looks like option 1 is probably the best, depending on how much you spend of course. It is also the simplest (deducting a few thousand dollars over 40 years is hardly worth it - and is a pain to keep records of).

Comes back to the question I asked depreciator above though - can't you effectively do both? Add it to the cost base, but then claim the costs in a depreciation report? This seems more comprehensive, and also simple as you should probably have a depreciation report anyway.

 

[depreciator]

It's a bit disappointing that you can't get a tax deduction for maintenance costs like this. Seems the best strategy is to rent it out initially (if you can), then either perform the renos while the tenant is there (if possible) or between getting new tenants.

To claim repairs/maintenance as an expense, the work must relate to damage done while you were renting out the place. There is a logic to this - otherwise people would buy burnt out hovels and claim the cost of fixing them up as an expense.
Even if you rent a place out first, you still can't claim the cost of fixing damage that was there when you bought it.

but I'm assuming that paint is expected to depreciate in far less than 40 years.

The ATO Effective Life for paint is 40 years. So if you buy a property and paint it immediately, you write off the paint at 2.5% over 40 years.

Comes back to the question I asked depreciator above though - can't you effectively do both? Add it to the cost base, but then claim the costs in a depreciation report?

You can't claim stuff twice.

 

[skater]

Hi SSers,

So I've been doing some research on the tax treatment of maintenance costs (e.g. painting, cleaning carpets etc) on an IP prior to renting (i.e. you buy a dilapidated house and restore it to original condition).



Anyone have any clarity on this?

Clarification: It is NOT maintenance, it is a renovation. Maintenance is something you do to a property to keep it in the same condition in which you bought it, or the same condition as the last Reno. You are talking about a capital cost, to bring it up to a standard to rent it out.

 

[dan c]

It's a bit disappointing that you can't get a tax deduction for maintenance costs like this. Seems the best strategy is to rent it out initially (if you can), then either perform the renos while the tenant is there (if possible) or between getting new tenants.

As Skater said, they aren't maintenance costs, but renovation costs.

The deduction is effectively built into the purchase price. If the property was in better condition when you bought it, it would have cost you more.

 

[BLTN]

To claim repairs/maintenance as an expense, the work must relate to damage done while you were renting out the place. There is a logic to this - otherwise people would buy burnt out hovels and claim the cost of fixing them up as an expense.
Even if you rent a place out first, you still can't claim the cost of fixing damage that was there when you bought it.



The ATO Effective Life for paint is 40 years. So if you buy a property and paint it immediately, you write off the paint at 2.5% over 40 years.



You can't claim stuff twice.

Thanks for this

Clarification: It is NOT maintenance, it is a renovation. Maintenance is something you do to a property to keep it in the same condition in which you bought it, or the same condition as the last Reno. You are talking about a capital cost, to bring it up to a standard to rent it out.

Thanks for clarifying. I do find it interesting though that the previous owner could do the EXACT same stuff and it would be maintenance, yet once it trades hands, it's a renovation (painting is hardly renovating, nor is cleaning carpets for example).

As Skater said, they aren't maintenance costs, but renovation costs.

The deduction is effectively built into the purchase price. If the property was in better condition when you bought it, it would have cost you more.

That's a good way to look at it I guess.

 

[Rob G.]

Thanks for this



Thanks for clarifying. I do find it interesting though that the previous owner could do the EXACT same stuff and it would be maintenance, yet once it trades hands, it's a renovation (painting is hardly renovating, nor is cleaning carpets for example).



That's a good way to look at it I guess.

Yes but ... the previous owner may have incurred the wear and tear in earning their assessable income.

You cannot claim repairs for their wear and tear in you taxable income.