If you have just procured your first rental property, then you will be looking for a good tenant, preparing for occupancy and thinking about its long-term viability. You have, of course, invested money into this project and will want to make a profit, so you will need to handle your tax affairs very carefully as you go. Still, you may have a lot of questions and some of these may revolve around deductions. For example, what's the difference between a capital improvement and a maintenance job? More specifically, how do you treat these for tax purposes?

Spot the Difference

While both activities involve alterations to the property or an associated asset, they are treated very differently from a tax point of view. 

Understanding Capital Improvement

Capital improvement refers to any work that adds long-term value to the property, while repair work is simply helping to maintain the health of the asset. In other words, you may be repairing something to bring it back into a proper working condition, so that it will continue to function for a given space of time.

For example, if you need to replace the tiles in the kitchen because they are simply worn out or look terrible, this is an example of a capital improvement. If you need to install a security system or replace window-mounted air-conditioners with a ducted system, these are once again examples of capital improvement. You are not meant to deduct the cost of these improvements in your current tax return, however. These will need to be included in a tax depreciation schedule so that you can get the benefit of your capital improvement when you sell the property. You'll be able to deduct those capital improvement costs from the money that you get for the property and pay tax on the adjusted amount.

Understanding Repairs

Conversely, repairs are not included in a depreciation schedule but are included as a deduction on your current tax return. You might need to fix a broken pane of glass, or clean the air conditioning vents. You might have to fix a leaking tap or change a dribbling showerhead. These repairs should be deducted in the current year. Of course, you can only deduct these costs if you are using the property for rental income and not as your personal residence.

Getting Advice

Tax depreciation can be a complicated and rather difficult subject to understand. If you're not sure, as you may be new to the market, you should talk with a consultant who specialises in tax depreciation.