Are rental property repairs tax deductible?

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Are rental property repairs tax deductible?

Most people will be aware that landlords can no longer charge depreciation against their rentals. The government did this is an attempt to reduce some of the tax advantages of rental ownership. So are rental property repairs tax deductible?As such, the IRD have been giving a lot of attention to the area of repairs and maintenance (R&M). There is a very real temptation for landlords to treat all R&M undertaken as expenditure. That way you get immediate benefit for the expenditure. However, the IRD is keeping a close eye on R&M claims as some taxpayers have been diverting large sums to R&M that the IRD believe should be capitalised. If the item is capitalised it will sit on the balance sheet where you can no longer claim depreciation.

Generally, replacing like with like is an example of justifiable R&M. If you were to replace the corrugated iron roof on your rental property, this would be probably be regarded as R&M. However, you might run into problems if you were to use concrete tiles or shingles. This hinges on a Court of Appeal case where the judgement identified repairs that were “…substantially different from the original”.

Substantial work is often an indicator that the work is of a capital nature and cannot be expensed. Some leaky building cases have had issues around this categorisation. We always take an approach that fundamentally any leaky building work should be R&M so long as the work does not change the character of the house or commercial building. However, care needs to be given to reclading for instance. Many monolithic clad dwellings are being replaced with weatherboards which should be justifiable R&M expenditure but what about new eves? In this instance an apportionment may be necessary with some expenditure capitalised and some expensed. Needless to say, any opinion will hinge on the facts of the individual case and these comments are necessarily general in their application.

As with all taxation issues, evidence is very helpful. Documents like architects plans and engineering reports are critical along with photographs of the work to be repaired.

If you are planning repairs to a rental building, be it commercial or residential, contact us prior to commencing work for advice.

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