Owners of residential rental properties must make sure their properties meet specific minimum standards. To meet these standards, landlords may be required to renovate their property, replace carpets, install heat pumps or buy new extractor fans. Some of these costs may be non-deductable, whereas others can be claimed on tax as deductible repairs and maintenance.
There are two types of costs - those of capital nature and revenue nature. And it's important to know the difference to understand if there is a tax concession that you can take advantage of.
Costs of revenue nature are generally tax-deductible and usually can be claimed the same year they are incurred.
Capital costs typically are part of the building and cannot be claimed on tax. There is generally no tax concession for bringing up a rental property to comply with Healthy Homes Standards. That's because the work usually results in the replacement, reconstruction or renewal of the whole asset (or substantially the whole asset) and goes beyond the standard repair of an existing asset.
Inland Revenue listed the following items as likely to be considered part of the building (capital nature) and therefore non-deductible:
- Smoke alarms
- Insulation
- Ducted or multi-unit heat pumps
- Flued fires (wood or gas)
- New or replacement openable windows
- New exterior doors
- Most extractor fans or range hoods
- Ground moisture barriers
- Drainage systems for storm, surface, and groundwater and drainage of water from roofs.
On the other hand, costs incurred in repairing, maintaining or restoring the asset to the original condition will be revenue in nature, meaning the expense will be tax-deductible. For example, a patch repair of insulation is likely to be considered revenue in nature and tax-deductible.
Some purchases like new carpets, curtains, window extractor fans and heat pumps will be considered capital in nature but will not form part of the building. So they can be regarded as separate assets and depreciated over time. Property investors will receive an immediate tax deduction if the item purchased is under $1,000 (below the current low-value asset threshold). The cost of others will need to be spread over several tax years. Refer to the IRD's guide below for more information.
The IRD's Residential Rental Property Chattels - Depreciation rates
If you are ever in doubt about whether you can claim the costs incurred to meet the HHS, seek advice before taking a final tax position.
For more information:
Can you claim depreciation on insulation costs?
The IRD's examples illustrating treatment of costs incurred to meet the HHS
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