I bought a rental property in Melbourne about 10 years ago. Most of the carpet in the property has worn out over time and I’m looking at replacing it. A friend mentioned I might be able to claim the costs of the new carpet as a tax deduction. Is this true?
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Yes, it is highly likely that the cost to replace the carpets will be tax deductible. However, whether you can claim a deduction for the full cost of the carpets straight away depends on whether the new carpet is a repair, or an improvement.
Generally, you can claim a tax deduction for the costs of repairs to your rental property in the year you spend that money. For tax purposes, 'repair' means work to fix or restore defects, damage or deterioration of the property.
Essentially, a repair should be restoring something to its original working condition.
Other than a new carpet to replace one that has been damaged over time, other repair costs can include: repainting, fixing leaks in the roof, replacing broken parts of fences, or replacing broken glass in windows.
However, if a substantial improvement or alternation is made to your property, for example by replacing your carpet with hardwood floors or a new long-wearing type of carpet, the costs may be considered an improvement.
Instead of claiming the cost of an improvement in the year you spend that money, you will claim a portion of the cost each year, for a set number of years.
This set number of years is based on the number of years the asset is expected to remain useful.
Essentially, a repair should be restoring something to its original working condition.
If you simultaneously incur costs that are related to both repairs and improvements to your property, you can only claim an immediate tax deduction for the cost of your repairs; the improvements will be tax deductible over time. If you hire a professional to carry out these works, you can ask for an itemised invoice to help work out the timing of your tax deductions.