Renovations and Your Tax Return
Renovating an investment property can significantly increase its rental value and capital growth potential. What many investors don't realise is that renovations also generate substantial ongoing tax deductions — if you claim them correctly.
Getting the tax treatment of renovations wrong is a common and costly mistake. This guide explains exactly what you can claim and how.
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Immediate Deductions vs Depreciation
Not all renovation expenses are treated the same way by the ATO. There are three categories:
1. Immediately Deductible Repairs and Maintenance
Repairs — restoring something to its original condition — are immediately deductible in the year the expense is incurred.
Examples of repairs:
- Fixing a broken fence (not replacing the entire fence)
- Patching a leaking roof (not replacing the entire roof)
- Replacing a broken door handle
- Repainting a room (maintenance, not a full building repaint)
2. Division 43 — Capital Works Depreciation
Structural improvements and the cost of new construction work are claimed as Division 43 capital works at 2.5% per year for 40 years.
Examples:
- Adding a new room or extension
- Installing a new bathroom or kitchen structure
- Replacing a roof (the entire roof, not just patching)
- Building a deck, carport, or pergola
- Installing fixed flooring (tiles, hardwood — not carpet)
- Constructing a swimming pool
3. Division 40 — Plant and Equipment Depreciation
Removable assets you install during a renovation are depreciated under Division 40.
Examples:
- New carpet
- Hot water system
- Air conditioning units
- Dishwasher
- Exhaust fans
- Blinds and curtains
- Ceiling fans
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The Initial Repair Rule
If you buy a property that needs work, the ATO may deny an immediate deduction for repairs carried out shortly after purchase. These are called "initial repairs" and are treated as capital expenses — even if they look like repairs.
The ATO's position: If the property was in a state of disrepair when you purchased it and you factored this into the price, the cost of fixing it is not a repair — it's part of the cost of acquiring the property.
Initial repairs are added to the cost base of the property and treated as a capital works claim. Getting this wrong is a common audit trigger.
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Why You Need a Quantity Surveyor for Major Renovations
If you've spent $30,000 or more on renovations, a Chartered Quantity Surveyor can:
Koste can review your renovation invoices and prepare an updated schedule. In many cases, we can increase your annual depreciation deductions by $1,500–$5,000 per year from renovations that were previously not claimed at all.
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Common Renovation Mistakes
1. Treating capital improvements as repairs Replacing your entire kitchen is not a repair — it's a capital improvement. Claiming it as an immediate deduction is incorrect and an audit risk.
2. Ignoring the depreciation on new fixtures and fittings Many investors renovate and simply expense the entire cost. If the work included new carpet, appliances, or hot water systems, those should be on a Division 40 schedule.
3. Not updating your depreciation schedule after renovating If your accountant is using your original depreciation schedule from when you purchased, it won't include any of the renovations. You need an updated report.
4. Missing the Division 43 on an extension Every structural addition generates Division 43 deductions. These add up significantly over a 20–40 year investment horizon.
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Getting Started
Use our Renovation Cost Calculator to estimate your renovation's total cost, then speak with Koste about an updated depreciation schedule that captures all your new deductions.