Please note: We assume your property is a rental property and used for investment purposes.

First, let’s understand the difference between a repair or a replacement.

Normal repairs to your rental property are tax deductions in the year they occur. A repair is “to make good” or remedy defects to the property or parts of the property. eg; repairing a fence.

If expenses go beyond repairs where you either significantly upgrade or replace an item then this is a capital expense and will have to be depreciated over 40 years. eg; complete replacing of an old fence with a new one. This is regardless of whether or not you used the same material or a very similar modern day equivalent; this is a “capital expense” and not a repair.

Some expenses may be a combination of both repairs and capital improvement. Replacing part of the wooden vanity cupboard due to water damaged (repair) and replacing the tiles around the vanity because they look a bit dated (capital cost). In this case, you would need to get the builder to separate and itemise the two costs as repairs or improvements. Otherwise the total cost would have to be classified as capital improvements.

When items are completely replaced eg; the carpet in an entire room that contained some damaged carpet, this is a capital cost to be depreciated but an immediate deduction would be available for the adjusted value of the old carpet.

Repairs vs. Capital Improvements

• Repairs are costs to fix or restore parts of the property to their original condition. Example: Replacing broken fence panels or fixing water-damaged cabinetry.

• Capital improvements involve upgrading or replacing items beyond their original state. These must be depreciated over 40 years. Example: Replacing an entire fence, even with similar materials, or updating tiles purely for aesthetic reasons.

• If an expense includes both repair and improvement, ask your builder to itemise the costs. Otherwise, the full amount may be treated as a capital expense.

Examples of Expense Treatment

Scenario Type Tax Treatment

Fixing part of a vanity due to water damage Repair Immediate deduction

Replacing tiles around vanity for aesthetic reasons Capital Depreciated over time

Replacing carpet in a room with partial damage Capital Depreciation applies; adjusted value of

old carpet may be deductible

Now, what happens if the entire house is destroyed?

Obviously, this is more than just a repair and the entire cost is capital in nature to be treated as a new depreciable asset. The un-deducted balance of your old property is immediately deductable.

If your property is a rental used for investment purposes, here’s how to treat expenses and insurance payouts under the latest ATO rules.

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💸 Insurance Payouts & Tax Implications

• Insurance payouts for property damage must be included in your assessable income.

• If the entire property is destroyed, the cost of rebuilding is capital in nature and treated as a new depreciable asset.

• The undeducted balance of the original property becomes immediately deductible when the payout is received.

• A Capital Gains Tax (CGT) event occurs at the time of the payout.

🔁 CGT Rollover Relief

You may be eligible to defer CGT through rollover relief if:

• You receive compensation for property damage via insurance.

• You rebuild or replace the property rather than sell it immediately.

This allows CGT to be deferred until the new asset is eventually sold.

🏗️ Summary of What Happens When a Property Is Destroyed

1. Insurance payout is treated as income.

2. Undeducted balance of the original property is deductible.

3. CGT event occurs at payout.

4. New building is treated as a depreciable asset.

🏠 Additional Considerations for Rental Property Owners

Claiming Deductions in Your Tax Return

To claim deductions for repairs, improvements, or insurance payouts:

1. Keep detailed records of all expenses, including invoices and receipts.

2. Separate repair costs from capital improvement costs.

3. Include insurance payouts in your assessable income.

4. Consult a tax professional to ensure compliance with ATO rules.

Impact on Rental Income

• Repairs may temporarily reduce rental income if the property is uninhabitable.

• Capital improvements can increase rental income by enhancing the property's value.

Depreciation Schedules

• Use a qualified quantity surveyor to prepare a depreciation schedule for capital improvements.

• Update your schedule annually to reflect new improvements or changes.

Record-Keeping Tips

• Use digital tools to track expenses and income.

• Store all records securely for at least 5 years.

📋 Frequently Asked Questions

What if I sell the property after receiving an insurance payout?

• A CGT event occurs, and you must report it in your tax return.

• Rollover relief may not apply if the property is sold rather than rebuilt.

Can I claim deductions for temporary accommodation costs?

• Temporary accommodation costs are generally not deductible unless they are directly related to earning rental income.

How do I calculate the undeducted balance of the original property?

• Refer to your previous depreciation schedules and residual values remaining in your schedule. Consult a tax professional for accurate calculations.