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Are costs of repairing cracks & painting tax deductible?

Discussion in 'Accounting, Tax & Legal' started by pthm, 22nd Oct, 2005.

  1. pthm

    pthm Well-Known Member

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    Tenants have moved out of our IP and there have been some cracks inside and outside the property (about 5 years old). New tenants are moving in a week's time. We wanted to repair the cracks and were told by the strata manager that the costs of repairing cracks would not be claimable under the strata building insurance policy because external cracks should be repaired by the developer / builder under the builder's warranty (however builder has shot through!) and internal cracks do not come under the strata building insurance policy. So, we have decided to leave the external cracks and get the body corporate to approach the issue collectively - almost every unit in the block has cracks.

    But, we still want to go ahead with repairing the internal cracks at our own expense before the new tenants move in. The tradesman said that after cracks are repaired, the walls have to be repainted. So, we further decided that the whole unit needs repainting as most of the walls have cracks and marks on them.

    Our question is whether the costs of repairing these cracks and painting the entire unit (only inside) can be claimed as a tax deductible expense item? Or, do they form part of the CGT cost base when we sell the unit in the future? Thanks for your views.
     
  2. Simon

    Simon Well-Known Member

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    If the work is being done to bring the unit back to the condition it was in when you bought it then it should be deductible.

    NickM?

    Cheers,
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The fence repairs analogy is useful to remember.

    If you repair a couple of sections of fencing, it is an expense.

    If you replace the whole fence, it is an improvement (capital).

    By this, I would suggest that painting an entire unit (regarless of the reason) would definitely be an improvement, and hence a capital cost.

    Fixing cracks would to me be a repair though, and painting over the repaired cracks would also be part of the repairs I would think - just not the entire wall/room.

    Just my opinion and not advice.
     
  4. pthm

    pthm Well-Known Member

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    Thanks, Simon and Sim, for your replies.

    Sim - from your reasons, I think I should get the tradesman to give me 2 separate invoices then - one for repairing the cracks and painting over them - deductible expense, another one for painting the rest of the unit - capital cost?

    I will see what Nick M says as well.
     
  5. Simon

    Simon Well-Known Member

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    I disagree Sim.

    If the unit has been owned for a length of time that equates to the normal timeframe between painting then an entire repaint is a repair back to original condition.

    Likewise if a house is owned for a decent length of time (ie the lifespan of a fence) replacing the whole fence with one of a similar quality would also be a repair.

    The example used is rebuilding a damaged carport is a repair whereas replacing it with a garage is an improvement.

    Hope this makes it clearer.
     
  6. BSB

    BSB Well-Known Member

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    I've just moved back into my property after almost (phew...just under...!) 6 years of letting it out. My advice was that any repairs/maintenance to bring it back to "pre-letting condition" were all legitimate expenses. Thus, I have had all interior repainted immediately post tenant departure and prior me moving back in. Likewise, the neighbouring fence needs attention. After final inspection and the tenants had moved out I made sure I got formal notice via a letter on property manager letterhead that x number of items required attention to bring the property back to "original condition". This is all within reason but yes, the phrase "repair" is much better employed than "replaced", especially re fence. Obviosuly entire kitchen and/or bathroom makeovers may attract the unwelcome attention of auditors in a certain dept. Don't get greedy!!
     
  7. pthm

    pthm Well-Known Member

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    Hi guys, thanks again for more replies and comments.

    BSB, we are not moving into the IP but we want the new tenants to live in reasonbly maintained property. We are only going to repair the internal cracks (which the tradesman told us they are due to the Sydney drought and re-settling of the building) and the painting has to be done for the repaired cracks. There are many cracks (some visibly large, some small). Since the painting will be done for most of the walls so we thought we should do the whole lot inside. We are not touching the kitchen or bathrooms. We are not even touch the external walls because they relate to the strata issue - and there are cracks on them too! The cost of repairing cracks and re-painting will equate to 2 months rent for us - but we have increased the rent by about 7% for the new tenants. (And, this is another interesting story which I will post on the forum later.)
     
  8. NickM

    NickM Co-founder Staff Member

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    Providing you have owned the property for more than 1 year (yes) then based on what you have stated ie we need to REPAIR cracks then it will be tax deductible.

    Just ensure your tradesmen specify "repair" on their invoice. If you "replace" an item then it could be classified as capital. Repairing cracks, painting etc are fully deductible.

    I recently had a tenant trash my property, L Lord ins only covered some of the damage :mad: (we have now changed insurers !) We spent $2700 all up and the rent was increased by $25 per week.

    Thats what i call a good return on Investment ! :D

    If your property is in need of a repaint then ask your RE agent how much extra rent could be obtained by repainting and tidying up. May be worth your while to do so.

    NickM
     
  9. pthm

    pthm Well-Known Member

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    Thanks, Nick M, for your reply.

    The repairing work on the cracks and repainting of all internal walls and ceilings have been completed today and yes, the invoice said " ... repair cracks on walls throughout, apply 2 coats of finished colour to all ceilings and all walls ...".

    Yes, we have had the IP for 3.5 years. Regarding the rent increase, it was a long story but when we first bought the property it was rented for $410 a week, then when tenants moved out we had to reduce it to $390 a week to get tenants - vacancy rates were high then and it took 4 week to get new tenants. Six months ago we found out that the identical unit next door was advertised for rent at $440 a week (managed by the same agent). We phoned agent and asked them to do a rental review on ours. They refused!!! We had to force them to do it - reasons were that tenants were good, it would cost more if tenants moved out etc. We said do it to increase rent to $420 a week. Tenants negotiated it down to $410 a week and we accepted. This month tenants moved out, a new property manager (same agency) took over the managing of our IP. She did not even consult us before hand and said she advertised the rent for $420 a week (and we should be very happy!). We said no, and told her to re-advertise for $440 a week. She obliged and had 2 open inspections and found new tenants who are moving in this weekend. Tenants basically took the property as it was (cracks, dirty carpet and marks on the walls). We did not tell them that we were going to repair cracks and repaint. In fact, the agent was not too concerned about the conditions of the property. However, we wanted to do the right thing and decided to do the repair work in between tenants - as they were willing to pay $30 more than the previous tenants - to ensure that they will be happy living in the property. So, when they move in this weekend they will have a very nice surprise that the place will look better than they saw (when previous tenants were still there). We hope they will keep the place in good conditions as they will find them.