Spring Clean Your Investment Property and Maximise Cash Flow
Spring is a great time for landlords to freshen up their rental properties. Key2 Realty Business Manager, Larissa Llowarch, said that regular property maintenance helps to protect your investment and can prevent significant damage from occurring later down the track.
Property investors have the benefit of claiming their Spring maintenance and cleaning costs as immediate tax deductions. But, how does this work and what do they need to be aware of to ensure any costs are claimed compliantly?
Bradley Beer, Chief Executive Officer of BMT, shared his advice on maximising cash flow from your spring cleaning and maintenance costs.
Defining cleaning and maintenance for investment property
Cleaning an investment property is the same as any other property. It includes both cleaning of outdoor areas and internal cleaning on items such as carpets.
Maintenance is simply an activity that prevents damage or deterioration of something, including property. For example, oiling a deck or servicing an air-conditioning unit are both considered maintenance activities.
Maximum cleaning and maintenance claims are all in the timing
Cleaning and maintaining an investment property can be a costly exercise, however it must be done to sustain the longevity and profitability of an investment.
The good news for investors is that these costs are entirely tax deductible in the year they occurred. This seems fairly straightforward, but the timing of the activity will control whether it’s an eligible tax deduction. These activities typically take place in three key periods:
- While it’s tenanted: Maintenance tasks are especially common while the property is tenanted to preserve the property’s condition. Given that the property is being used to produce income while the maintenance or cleaning activity is taking place, the costs are immediately tax deductible.
- Between tenants: The space between tenants is the ideal time to complete any cleaning and maintenance. However, it’s important that these are done while the property is still ‘genuinely available for rent’ as defined by the ATO. This generally means that the property manager in charge is advertising the property for rent. As long as the property is available for rent, the cleaning and/or maintenance costs will still be tax deductible in the same financial year even though the property is vacant.
- Before it goes on the rental market: Sometimes a property is purchased for the sole reason of an investment, or the owner is converting their main residence into an investment. Whichever the scenario, any cleaning and maintenance completed before the property is available as a rental will not be tax deductible as it’s not genuinely available for rent.
Understanding the difference between maintenance, repairs and improvements
When something isn’t maintained properly, or is damaged, a repair normally needs to happen like fixing part of a rusted gutter or a crack in a wall. Fortunately for property investors, repairs are also instantly tax deductible in the same financial year.
The next stage after a repair is a capital improvement. This is defined as something that improves beyond its original state.
For example, if a property’s carpet was partially damaged and the owner replaced the damaged section with the same carpet, this would be a repair. However if they replaced the entire carpet with higher-quality carpet or new flooring it may be considered an improvement.
When it becomes an improvement how is it claimed?
When something is improved, it can only be claimed using depreciation over a period of time. This is where a specialist quantity surveyor comes in and updates or provides a comprehensive tax depreciation schedule of the property.
Depreciation deductions can be claimed while the property is available for rent. It is an annual tax deduction for the natural wear and tear of property and assets over time. While claiming back money from an improvement takes longer than a repair, the long-term benefits of cash flow are still evident.
It’s also important to remember just because something must be depreciated doesn’t mean it can’t be claimed quickly.
The immediate deduction allows investors to instantly claim some plant and equipment assets valued up to $300 instantly. Low-value pooling also accelerates depreciation deductions for plant and equipment assets that cost or are valued up to $1,000.
Investors who are making improvements to their investment property are encouraged to speak with a depreciation specialist to ensure they claim everything they are entitled to compliantly.
If you are looking to freshen up your rental property this spring, remember that in line with the Residential Tenancy Agreement, landlords must give tenants notice before they attend the property or organise a contractor to undertake any cleaning, maintenance or repair work.