Is the cost of repairing a leaky building deductible for income tax purposes?

As with many tax questions, the answer is not a simple “yes” or “no”. Whether you can claim a deduction for expenditure on repairing a leaky rental property will depend on the nature and extent of the repair work you undertake.

The costs of undertaking repairs and maintenance to a rental property will be deductible for tax purposes provided the work undertaken is not a capital improvement. If the expenditure is on repairing a damaged asset or restoring an asset to its original state, the expenditure will generally be deductible. For example, the cost of replacing a section of water damaged wall lining and repainting it would generally be deductible. However, if the work changes the character of the asset or involves the substantial reconstruction, replacement or renewal of the asset, the work will be a non-deductible capital improvement. For example, the cost of recladding all the exterior walls of a building with a superior, more durable cladding than the original one would generally be non-deductible.

The difficulty is in identifying where the work crosses over from being a deductible repair to a non-deductible improvement. The key to this is identifying the asset on which you are working, as this will influence whether the work results in the substantial reconstruction, replacement or renewal of the asset. For example, if you identify the roof of a building as the asset, re-roofing the building will result in the replacement of the entire asset and leads to the conclusion that the expenditure is a non-deductible capital improvement. However, if you identify the building as the relevant asset, re-roofing with the same material as the old roof may be a deductible repair. Inland Revenue has published guidelines on how you identify the relevant asset.

Inland Revenue has recently updated its webpage on leaky buildings to provide additional guidance to taxpayers trying to determine whether the work on their building is deductible. Unfortunately, the examples Inland Revenue provides are not overly helpful, as they tend to be at the extremes of the possible scenarios rather than in the less clear-cut middle ground where many taxpayers find themselves.

If you are about to undertake repairs to a building, whether leaky or otherwise, talk to your Crowe Horwath adviser about whether the cost of the proposed work will be deductible or will need to be capitalised.