IS THAT PROPERTY EXPENSE CLAIMABLE

Every year, hundreds of residential property investors claim expenses for the costs of fixing up and upkeeping their rental properties.  When expenses are incurred, investors fully expect to receive a tax deduction for the money they’ve spent but not all expenses are deductible.

Whether an expense is claimable depends upon the nature and extent of the work carried out in relation to the property as a whole.  Generally, interest on loans taken out to purchase a rental property are usually the largest expense a landlord incurs. Thankfully, this cost is 100% tax deductible from 1 April 2025.  80% of the cost of interest is deductible in the 2024/2025 year. The next biggest expenditure property investors experience are those that fall under the heading ‘repairs and maintenance’. As as these expenses can be significant, it’s important for property owners to understand if the cost is deductible or not.

MAKING A DETERMINATION

In recent years, lots of tax cases have been heard determining what and when a particular expense is claimable.  Broadly speaking, when the work undertaken restores an asset to its original state, the expense will be claimable under the category repairs and maintenance.  Accordingly, the expense is likely to be tax deductible.  When the work goes beyond that point however, the expense may be considered to be of a capital nature and thus, non-deductible against the revenue the property produces.

Confusion can lie in deciding whether the work undertaken and consequently the expenditure suffered has resulted in an improvement to the property above and beyond mere appearance.

EXAMPLE

Take for example replacing wooden weatherboards of a house with say brick which significantly improves the value of the house. As the materials used are not similar in nature and as the use of them has significantly improved the property in a permanent way, the expense is likely to be non-claimable.  

Compare this to replacing the wooden weatherboards with say linear weatherboards.  Because the latter material is of a similar nature to the original weatherboards, the expense is probably claimable and thus deductible.  You can see the distinction is subtle and often cause headaches for Accountants when attempting to identify what camp the expense falls into. 

THE IMPORTANCE OF TIMING

Another criteria for an expense to be tax deductible relates to timing. There must be a nexus between the expenditure incurred and the deriving of assessable income from the property.  

For instance, let us assume Mr Smith owns his home, decides to buy a new home, and rent out his original home.  He decides to tidy up the property and complete repairs he's been meaning to effect prior to renting the property.  Mr Smith carries out the repairs.  After this he looks for a tenant.  The cost of the repairs is likely to be deductible from the rental income the property produces.  

Contrast this to Ms Brown whose tenants also moved out of her rental property.  She decides to move into the property herself and use it as her home.  After a year, she carries out repairs on the home.  Ms Brown attempts to claim the cost of the repairs on the basis they were required to fix the damage the house incurred when the property was tenanted.  Because the house is no longer being used to derive assessable income however, its likely the expenses are non-deductible eg: the requisite nexus between the expenditure incurred and the deriving of assessable income from the property does not exist.  

SUMMARY

Because claimable expenses can have a significant impact on the end tax position, it’s sensible to check with an Accountant whether the proposed expense will be claimable. Being fully informed enables better quality decisions.  This is especially pertinent where large expenses will be incurred, such as when property investors undertake large project renovations to their residential investment property.