Repairs vs Capital Expenses: What Rental Property Owners Need to Know

If you own a rental property, correctly classifying your expenses is vital. The Australian Taxation Office (ATO) scrutinises how repairs, maintenance, and improvements are claimed. Misclassifications can lead to denied deductions, amended returns, or penalties.

This guide explains:

• What qualifies as a repair or maintenance expense

• When an expense is capital in nature

• How capital works and depreciating assets are treated

• Tips to stay compliant

1. Repairs & Maintenance: Deductions in the Year Incurred

Repairs and maintenance keep your property usable and address defects, damage, or wear and tear arising from renting. These costs are typically deductible in the same year they are incurred, provided:

• The property is genuinely available for rent (or is rented continuously)

• The expense relates directly to damage or deterioration caused during the income-earning period

Examples include:

• Fixing a leaking tap or pipe

• Replacing broken windows or broken sections of gutter

• Patching small sections of fencing

• Repairing appliances or wiring

The key is that repairs restore something to its prior condition without enhancing its function or performance.

If maintenance work and repairs are done together with capital works, you must separate (apportion) the cost between the repair portion and the capital portion.

2. Initial Repairs: Treated as Capital

Repairs required because of damage or deterioration that existed when you acquired the property cannot be claimed immediately. These are termed initial repairs. Even if you were unaware of the issues at purchase, the cost must be treated as capital.

Initial repairs are added to your cost base for capital gains tax (CGT) purposes. Over time, you may claim capital works deductions or capital allowance deductions for depreciating assets.

3. Capital Works & Improvements: Claim Over Time

When work goes beyond restoring a property and instead improves it — adds value, extends its life, or changes functionality — the expense is capital in nature. You cannot deduct the full cost in the year incurred. Instead you must claim it over a period.

Capital works are structural improvements, additions, or larger renovations. Under ATO rules, capital works are generally claimed at a rate of 2.5% per year over 40 years (subject to exceptions).

Examples of capital works include:

• Building extensions or adding rooms

• Significant renovations (e.g. full kitchen or bathroom overhauls)

• Structural changes (e.g. adding a deck or re-roofing)

When an entire component is replaced — known as repairing an “entirety” — that cost must be capitalised. For example, replacing an entire roof or installing a new heating system would not count as a repair.

Depreciating assets are separate from capital works. These are assets with a limited useful life (furniture, appliances, equipment). If you install or replace a depreciable item, you claim its decline in value (depreciation) over its effective life.

4. How to Decide: Repair vs Improvement

Determining whether a cost is a repair or capital expense often depends on judgement and documentation. The following principles help:

• If the work maintains or restores an item to its prior condition, it’s likely a repair

• If the work improves, upgrades or changes function, it is likely capital

• The scale of work matters: small patching vs full replacement

• Whether the item replaced is “identifiable as a separate capital item” may push it into capital expense territory

• Always ask for itemised invoices from tradespeople to aid in apportionment

5. Case Studies & ATO Alerts

The ATO warns that many rental property owners misclassify capital expenses as repairs. For example:

• Fixing a dishwasher is generally a repair

• Buying a brand new dishwasher (if above the $300 low-cost asset threshold) is a depreciating asset, not a repair

• Replacing a full roof is a capital works expense

• Replacing a few damaged roof tiles may count as a repair

In one recent case, a tax adviser argued successfully before the ATO that a $138,000 roof repair was in fact a repair, not a capital expense. The evidence showed the work simply restored the property to its original condition, rather than adding value.

The ATO is increasing its focus on rental property claims, using data matching and benchmarking across suburbs and property types. Incorrect or exaggerated claims may trigger audits.

6. Record Keeping & Compliance

To reduce the risk of claims being rejected:

• Keep receipts, invoices, bank statements, supplier details, item descriptions, and dates

• Use itemised invoices to separate repair and capital costs

• Document how you arrived at any apportionments

• For capital works, maintain records of construction cost or heritage data

• If in doubt, obtain a quantity surveyor or qualified professional to assist with depreciation and capital works schedules

If you own rental properties, correct classification of expenses is critical. Repairs and maintenance can be claimed immediately. Initial repairs, capital works, and depreciable assets must be treated differently. Keeping clear records and seeking professional advice will help you maximise your deductions while staying compliant.