Deductible Property Maintenance

As property investors begin to enter the market again, it is timely to look at the deductibility rules on repairs to a property.

The tax rules say that eligible repairs are deductible where there is a link between the expense and a receipt of income. Eligible repairs are fully deductible, whereas costs of improvements to the property are considered capital expenditure and non-deductible.

IRD defines repairs and maintenance as expenditure to restore an asset to its previous state (i.e. at purchase) and includes work to fix or prevent damage or deterioration to the asset. Capital expenditure is defined where value is added to the property, and it is enhanced beyond its original state at time of purchase.

The dollar value of the expense in relation to cost of the property can also be considered, but the key is identifying the relevant asset or part of the asset. An example is a roof repair, where a full replacement is normally fully deductible repair as it does not create a new asset, but a change to the roof while adding a new room would likely be capital.

As with life timing is everything and the timing of when repairs are done can also determine the deductibility.

For a rundown property that is renovated prior to tenancy, the expenditure will generally be capitalised as the purchase value is reflected in its current state and the spending is enhancing and adding value.

Work done prior to selling should be done while a tenancy is in place to try and get the deductibility. Once the tenancy has ended the required nexus between income and expense is no longer maintained, so deductibility is lost.

We are not giving out tax advice and recommend you talk to your tax adviser if any of these scenarios apply to you.

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