Initial repairs after buying a property
One of the most misunderstood areas in property tax is the treatment of repairs done shortly after purchase. Many investors assume that all repairs are immediately deductible — but this is not always the case.
The ATO's distinction: initial repairs vs ongoing repairs
Ongoing repairs — fixing wear and tear that occurs during your ownership — are immediately deductible. For example, fixing a broken fence after a storm while you own the property.
Initial repairs — fixing defects or damage that existed at the time of purchase — are capital in nature. The ATO treats them as part of the cost of acquiring the property in its improved state, not as a maintenance expense.
This distinction is set out in Tax Ruling TR 97/23 and has been applied in numerous ATO audit decisions.
Why initial repairs are not immediately deductible
The ATO's reasoning is that when you buy a property with known (or reasonably discoverable) defects, you price those defects into what you pay. Fixing them improves the asset to the condition you expected when you bought it — which is capital improvement, not maintenance.
What happens to initial repair costs
Instead of being claimed immediately, initial repair costs are treated in one of two ways:
How do you tell the difference?
The key test is whether the defect existed before you purchased the property:
- Did the building inspection report mention it?
- Was the price discounted because of it?
- Did you know about it at settlement?
If the defect arose during your ownership (a pipe bursts, a tenant damages a wall), the repair is an ongoing repair and is immediately deductible.
Practical advice
Keep your building inspection report and any pre-purchase correspondence about property condition. This documentation helps your accountant and quantity surveyor correctly classify your first-year repair costs.