Repairs vs capital improvements: how rental property work is taxed

Work on a rental property falls into three tax treatments: genuine repairs and maintenance that fix wear, tear or damage arising while the property is rented (or genuinely available for rent) are deductible in full in the year incurred; improvements and structural work are capital works, deductible at generally 2.5% a year over 40 years under Division 43; and new depreciating assets such as appliances, carpet and curtains are claimed as decline in value under Division 40 — immediately if they cost $300 or less. Fixing damage that already existed when you bought the property is an “initial repair” and is always capital, even if you did not know about the damage at purchase.

Key points:
- Repairs and maintenance are immediately deductible only where they fix wear, tear or damage that arose **while the property was rented** or genuinely available for rent — the ATO’s examples include replacing a cracked window pane, part of a gutter or part of a fence, and repainting faded walls ([ATO repair and maintenance guidance](https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/residential-rental-properties/rental-expenses/repair-and-maintenance-expenses), updated 22 May 2026).
- The boundary test comes from [Taxation Ruling TR 97/23](https://www.ato.gov.au/law/view/document?docid=TXR/TR9723/NAT/ATO/00001): a repair restores efficiency of function without changing character, while work that provides something new, changes the item’s character, or replaces an “entirety” — a whole fence, an entire toilet, complete kitchen cupboards — is capital, even like-for-like.
- **Initial repairs are always capital.** Damage or deterioration existing at purchase cannot be deducted immediately, whether or not you knew about it; structural initial repairs go into capital works over 40 years, initial repairs to depreciating assets get no deduction at all, and the costs feed into the CGT cost base.
- Capital works ([Division 43](/technical-resources/glossary#capital-works-deduction)) are claimed at generally **2.5% a year over 40 years** for residential construction commenced after 15 September 1987, based on the actual construction cost — never the purchase price — and only from completion of construction.
- Depreciating assets — carpet, curtains and appliances — are claimed as decline in value: immediately if they cost **$300 or less** (unless part of a set costing more), otherwise over their effective life; and since 7:30 pm (AEST) on 9 May 2017, residential investors generally cannot claim second-hand assets at all.
- Records decide the close cases: itemised invoices separating repair work from improvement work, construction cost details, and before-and-after photos of capital works, kept for at least five years.
- **Timing changes from 2027-28, classification does not.** Under Schedule 2 of the [Treasury Laws Amendment (Tax Reform No. 1) Act 2026](https://www.legislation.gov.au/C2026A00049/asmade), where deductions relating to residential dwellings exceed the income from them for a year, the excess is quarantined and carried forward rather than deducted that year. A repair is still a repair — but when the deduction can be *used* may change.