How Property Repairs, Maintenance and Improvements Can Strengthen Your Tax Position
Improving your investment property can do more than enhance its appeal to Renters, it can also deliver valuable tax benefits when structured correctly.
Repairs vs maintenance vs property upgrades
For Victorian Residential Rental Providers (RRPs), understanding how the ATO treats repairs, renovations and upgrades is key to maximising returns and avoiding costly mistakes.
“By keeping on top of repairs and choosing upgrades that add real value, property investors can maximise both their investment and the tax benefits it provides.” Jessica McFarlane-Ogden, Miles Real Estate Partner
Let’s start by discussing the differences between repairs, maintenance and property upgrades. They may seem similar, but each serves a different purpose. Repairs and maintenance usually involve fixing damage or addressing the usual wear and tear that naturally occurs as renters live in your property, for example repairing an oven, servicing a heater and an air conditioning unit, and replacing a broken fence panel. These tasks help keep the property in good working order and ensure it remains safe, comfortable and appealing for your Renters.
Property upgrades on the other hand, go a step further by upgrading or enhancing the property beyond its original condition, such as installing a new kitchen or replacing your household appliances with energy efficient appliances.
Below is a clear, practical guide to how different property improvements are treated for tax purposes.
1. Immediate deductions: Repairs & maintenance
You can generally claim the full cost of repairs and maintenance work immediately as a tax deduction.
Common examples include:
- Fixing broken plumbing
- Repainting after renter damage
- Replacing broken windows
- Repairing existing fixtures or fittings
These works simply restore the property to its original condition and do not improve or upgrade it beyond its previous state.
Tax benefit: The full cost can be deducted in the same financial year, reducing your taxable rental income.
2. Capital works deductions: Structural improvements
More substantial upgrades are classified by the ATO as capital works.
Examples of capital works include:
- Renovating a kitchen or bathroom
- Adding a deck or extra room
- Replacing the roof
- Installing solar panels or air conditioning
- Major renovations and major structural works
These costs cannot be claimed upfront. Instead, they are claimed over time at 2.5% per year for up to 40 years, in line with ATO rules.
Example: Spend $40,000 on a major renovation → claim $1,000 per year for 40 years.
3. Depreciation: Plant & equipment
If you install new depreciable assets, you may be able to claim depreciation over their effective life.
Typical items include:
- Appliances
- Carpets and blinds
- Hot water systems
- Air conditioners
Example: A $2,000 oven may be depreciated over approximately 10 years.
Important: For properties purchased after May 2017, depreciation can only be claimed on brand-new assets you install yourself, not items that were already in the property when you purchased it.
4. Capital gains tax (CGT): Boosting your cost base
Even if an improvement cannot be claimed immediately, it may still deliver a future tax benefit by increasing your property’s CGT cost base.
This means that when you sell, your taxable capital gain is reduced by the value of those improvements.
Example:
- Purchase price: $600,000
- Improvements: $50,000
- Sale price: $800,000
CGT is calculated using a cost base of $650,000, not $600,000 — reducing the taxable gain.
5. Interest deductions on borrowed funds
If you take out a loan — or redraw from an existing investment loan — to fund property improvements, the interest on the borrowed amount is generally deductible against your rental income.
This can further enhance the cash-flow benefits of improving your investment property.
Additional benefits of property improvements
Beyond immediate tax deductions, well-planned improvements may also provide:
- Depreciation schedules: Ongoing annual deductions for building works and depreciable assets
- Increased borrowing power: Renovations may increase property value and enable refinancing
- Future CGT advantages: Capital improvements reduce taxable capital gains when the property is sold
Example:
- Repainting a rental unit ($2,500) → claimed in full in the current year
- Installing a new kitchen ($20,000) → claimed through annual depreciation and added to the CGT cost base
Summary: Property improvement tax rules at a glance
- Repairs & maintenance → immediately deductible
- Capital improvements → claimed over time at 2.5% per year
- Appliances & fittings → depreciated over their effective life
- All improvements → added to your CGT cost base
- Borrowed funds → interest generally deductible
Thinking of upgrading your investment property?
At Miles, we work closely with Victorian Residential Rental Providers (RRPs) to help them make smart, strategic property decisions, from day-to-day maintenance to value-adding improvements:
- Rental properties we have worked on to date achieve additional rental income following the works.
- Our quick turnaround times i.e. ensuring you are back in the rental market within 2-3 weeks of work commencing.
- Cost and obligation free quotes and consultations, so you are under no pressure to go ahead.
If you’re considering upgrades or renovations and want guidance on how they may impact your investment returns, speak with our experienced Concierge or Property Management team.
Note: General information only. Always seek advice from a qualified accountant or tax professional regarding your personal circumstances.
