Home renovations can be exciting, whether it be a kitchen upgrade, home office addition, or improving an investment property.
It is important to understand how such renovations can impact your tax obligations when deciding what you want or need to do.
In Australia, the rules regarding how renovations are tax-deductible depend on the use of the property and type of renovation undertaken.
Here, we’ll explain what you can and can’t claim and how to maximise your renovation budget.
Understanding The Basics: What Qualifies As A Tax Deduction?
The Australian Taxation Office (ATO) draws clear lines between different types of home improvements. For your primary residence, most renovations aren’t tax-deductible, but the story changes completely for investment properties.
The key is understanding three main categories: repairs, maintenance, and capital improvements. Repairs fix something that’s broken, maintenance prevents things from breaking, and capital improvements add value or extend the property’s life. Each category has different tax implications, and mixing them up could lead to rejected claims or ATO audits.
Repairs, Maintenance, And Capital Improvements
The Australian Taxation Office (ATO) divides property-related work into three main categories:
- Repairs: Works done to fix damage or wear-and-tear, like patching a wall hole or replacing a broken window. Repairs ordinarily restore something to its original condition and potentially tax-deductible in the same financial year, if related to an investment property.
- Maintenance: Work undertaken to keep property up in good condition, such as cleaning eaves troughs or painting to prevent deterioration. Just like repairs, maintenance deductions apply if associated with investment properties.
- Capital Improvements: New enhancements that add value, prolong the life of the property or change the property’s use: for example, the addition of a second bathroom or the installation of a new deck. You may not deduct these items in the year incurred; however, you can claim depreciation on these costs over several years under the Capital works deduction.
Understanding these distinctions is key to planning renovations that offer the best financial returns.
Primary Residences vs. Investment Properties
The tax treatment of renovations depends significantly on whether the property is your primary residence or an investment property.
Primary Residences
For your main home, most renovation expenses are not tax-deductible. However, they may affect your capital gains tax (CGT) liability if you sell the property. Capital improvements, for instance, can be added to your property’s cost base, potentially reducing CGT when you sell.
Investment Properties
Investment properties offer more opportunities for tax deductions:
- Repairs and Maintenance: Immediate deductions can be claimed for work directly related to generating rental income.
- Capital Improvements: These are depreciated over time, typically at a rate of 2.5% per year for up to 40 years.
- Appliances and Fixtures: Items like air conditioners or kitchen appliances may qualify for depreciation under plant and equipment rules.
Tax-Deductible Renovation Categories
1. Home Office Renovations
Increased remote work has increased the number of people working from home. If you dedicate a particular area of your home as a working space, you may deduct certain renovation costs you incur. This may include:
- Installation of built-in bookcases
- Better lighting
- Repainting or recarpeting the office
Deductions are based on the proportion of the space utilised for work. Keep a record of how you justify your claim.
2. Energy-Efficient Upgrades
While upgrades sometimes involve solar panels or double-glazed windows, their deduction is not offered for primary residences; depreciation of such costs is available in investment properties. These upgrades can also increase the value of the property while appealing to green tenants.
3. Accessibility Modifications
Any modifications related to the accommodation of a disability such as installing a ramp or widening of doorways shall be deductible under certain conditions, which apply to both primary residences and investment properties, provided that such modifications have been prescribed by a medical practitioner.
4. Essential Repairs For Investment Properties
The necessary repairs to make a property tenantable, such as repairs to plumbing issues or replacing a damaged roof, can be fully expensed in the year incurred. It is, therefore, found essential to emphasise repairs on properties that yield rental return.
Non-Deductible Renovations
Not all renovation expenses offer tax benefits.
For example:
- Luxury Additions: Swimming pools, designer landscaping, or high-end finishes are generally seen as lifestyle choices and not deductible.
- Cosmetic Upgrades: Painting a primary residence or redecorating typically doesn’t qualify for deductions.
- Improvements Before Renting: Any work done before a property is available for rent is considered initial capital expenditure and isn’t deductible immediately.
When To Consult Expert Tax Accountants?
Tax laws around renovations can be complex and change frequently. While minor repairs might be straightforward to claim, major renovations often require professional guidance.
At KPG Taxation, our tax accountants specialise in simplifying tax matters, helping you maximise your claims and minimise your stress. Whether you’re renovating for personal comfort or to boost rental income, we’ll guide you every step of the way.
