Mary owns a residential rental property. During an inspection, she notices that exterior boards at the rear of the property have developed moss and lichen due to the winter dampness. Mary engages a handyman to waterblast the area. She notes that this is a task will need to be performed every year. In this case the work done does not improve the value of the property but restores the exterior to its original condition. The expenditure will be recurrent but with minimal cost. This is a deductible expense.
Mary’s handyman has discovered that some timber framing around a window is rotten and needs replacing.
To make the repairs the cladding and window needs to be removed and refitted.
Although this is a reasonable amount of work and expense to Mary these repairs are deductible as the work does not amount to reconstruction, replacement or renewal of substantially the whole of the house.
Nor do the repairs change the character of the house.
Mary has decided that the heating is inadequate for her tenants. She opts to install two heat pumps, one in the central living area and the other in the hallway close to the bedrooms.
Mary doesn’t have the funds readily available so finances the purchase via bank debt. The heat pumps are separate identifiable assets and therefore cannot be expensed.
However, Mary is entitled to make a depreciation claim for the useful life of the assets.
Mary’s tenants have transferred to Auckland. Mary has been considering the addition of a bedroom to the house and takes this opportunity to start renovation work.
This is a major construction project which substantially improves the property’s value. This expenditure is capital in nature.
As it is part of the building there is no deduction available.
This is a grey area of tax legislation with no ‘one size fits all’.
If you own a rental property and are contemplating improvements, please contact your Crowe Horwath advisor to find out how we can assist you.
■ This information is general in nature and readers should seek specialist advice before making financial decisions.