Repairs vs improvements: what you can claim (and what you can’t)
The starting point is determining whether the money you’re spending is intended to generate income. If so, you may be able to claim a deduction, but only if the expense isn’t capital in nature. Capital expenses, like major improvements, aren’t immediately deductible, though some may be depreciated or qualify for other concessions.
There’s no strict legal definition of “capital” in this context, so Inland Revenue and the courts look at each case’s facts.
Generally, repairs and maintenance that restore an asset to its original condition are deductible. Improvements that enhance or change the character of the property are not.
A practical two-step test to assess deductibility
To determine if an expense is deductible:
- Identify the asset: Is it a property, a part of a property, or something else?
- Assess the work: Has the work simply repaired or maintained the asset, or has it improved or substantially replaced it?
For example, fixing a broken toilet or patching a leaky roof is usually deductible. Replacing an entire roof, especially if you upgrade materials or add insulation, is likely to be considered an improvement and therefore a capital expense.
Common traps we see (and how to avoid them)
- Initial repairs on newly acquired property: If you buy a property and carry out repairs straight away (before you start earning rental income), these are often treated as capital expenditure, because they can be seen as part of the cost of getting the property into income-earning condition. If you rent the property for a period before making repairs, those costs may be deductible.
- Upgrading to meet new standards: Bringing a property up to “healthy homes” standards, fixing leaky buildings, or seismic strengthening may be treated as capital expenditure where it improves the property beyond its original state. The detail matters, so it’s worth checking before you start.
- Like-for-like replacements: A like-for-like replacement is more likely to be treated as a repair. Where you upgrade (for example, moving from single glazing to double glazing), Inland Revenue may view this as an improvement and therefore deem this to be capital expenditure.
Tips for property owners
- Keep detailed records: Document the condition of the property before and after work, keep contracts and invoices, and note your instructions to contractors.
- Understand the functionality: If you’re replacing something, try to match the original as closely as possible if you want to claim a deduction.
- Be cautious with initial repairs: Costs incurred soon after purchase are often capitalised, not deducted.
How BDO can help
The line between repairs and improvements isn’t always clear. Your local BDO adviser can help you work through the facts, document the right evidence, and agree a practical approach before you commit to the work.
Watch more insights in our Eyes on Tax video series, covering topics including tax residency, expanding your business overseas and trustee tax.
