Rental Property: Repairs vs Improvements (2025-26)

General information only. Speak with a registered tax agent for advice.

When something goes wrong at your rental property, whether you can claim the cost immediately or must depreciate it over years comes down to one question: does the work restore the property to its original condition, or does it make it better than it was? This distinction — repairs versus improvements — is one of the most misunderstood areas of rental property taxation, and it is a consistent focus area for ATO compliance activity.

The core rule

A repair restores something to its former state without changing its character. It deals with damage, deterioration, or defective function. A repair is an immediate deduction — you claim the full cost in the year you pay it.

An improvement takes the property (or part of it) beyond its original condition — making it more functional, more durable, or more valuable. An improvement is capital expenditure and must be depreciated over time, either as plant and equipment under Division 40 or as capital works under Division 43, depending on what it is.

The ATO also uses the concept of a “unit of property”: the repair/improvement question is assessed for each discrete part of the property, not the building as a whole. Replacing a broken window is a repair to that window. Replacing all windows throughout the property with a higher-spec product is more likely to be an improvement.

Scenario comparison table

Scenario	Repair or improvement?	How to claim
Replace broken window with same glass	Repair	Full deduction this year
Replace single-glazed windows with double-glazed	Improvement	Depreciate (Div 43, 2.5%/yr)
Fix leaking tap	Repair	Full deduction this year
Replace entire bathroom with modern fitout	Improvement	Depreciate (Div 43, 2.5%/yr for structure; Div 40 for fixtures)
Repaint walls in the same colour	Repair	Full deduction this year
Repaint and replaster walls after water damage	Repair (restoring damage)	Full deduction this year
Add a new deck or pergola	Improvement (new structure)	Depreciate (Div 43, 2.5%/yr)
Replace like-for-like carpet	Repair	Full deduction this year
Upgrade worn carpet to polished hardwood floors	Improvement	Depreciate (Div 40 — effective life)
Fix gutters with same materials	Repair	Full deduction this year
Replace old gutters with new oversized gutters	Improvement	Depreciate (Div 43)
Re-tile bathroom floor using same tiles	Repair	Full deduction this year
Re-tile bathroom floor using different/premium tiles	Likely improvement	Depreciate (Div 43)

The initial repairs trap

This is the most common mistake investors make. If you buy a property and immediately carry out work to fix existing defects that were there at the time of purchase, those costs are not deductible as repairs — even if the work is restorative in nature.

The ATO’s position is that initial repairs reflect the condition of the property at the time you bought it, which is factored into the purchase price. They are treated as capital expenditure and added to the cost base for CGT purposes, or depreciated if they relate to a depreciating asset.

Example: You buy a property with a broken fence and cracked plaster. You spend $4,000 fixing both in your first month of ownership. Even though this is clearly repair work, none of it is immediately deductible. It is capital expenditure because you knew (or should have known) about the defects when you bought the property.

The exception: If a property is in good condition when you buy it and damage occurs after you become the owner, subsequent repairs to that damage are deductible in the normal way.

The substantial renovation trap

If repairs are so extensive that the overall character of the property changes — or the property is substantially renovated — the work is likely to be treated as capital even if each individual item was nominally a repair.

The ATO looks at the scope and scale of the work. A project that replaces the kitchen, bathroom, flooring, and repaints throughout in one program of work will often be classified as a capital improvement to the whole property, not a series of separate repairs.

Splitting mixed invoices

Many jobs combine repair and improvement elements. If a tradesperson’s invoice includes both, you need to apportion the cost. Ask for an itemised quote that separates the repair work from any upgrade work. This is both a good record-keeping practice and makes the tax treatment straightforward.

Example: A plumber replaces a burst pipe (repair) and, at your request, also reroutes the plumbing to add an extra tap point (improvement). The burst pipe repair cost is deductible immediately; the cost of the new tap point must be capitalised.

Depreciation rates for common improvements

When work is classified as an improvement, the depreciation treatment depends on what it is:

Division 43 (capital works — structural): 2.5% per year for 40 years. Applies to the structure of the building — walls, roof, fixed plumbing, concreting.

Division 40 (plant and equipment): Depreciated over the ATO’s specified effective life. Applies to removable or mechanical assets — hot water systems, air conditioners, carpet, dishwashers.

Only applies to properties constructed after 16 September 1987 (for Div 43) and to new plant and equipment you install (for Div 40, for residential properties acquired after 7 May 2017).

Worked example

Lisa buys a 1990s unit in Melbourne for $450,000. In the first full year of ownership she carries out three separate projects:

Project 1 — Leaking roof: $5,000 The roof developed a leak during a storm six months after settlement. Lisa pays $5,000 for a roofer to find and repair the leak and replace the damaged tiles with matching tiles.

• Classification: Repair (damage occurred after purchase, same-standard materials)
• Tax treatment: Full $5,000 deduction this income year

Project 2 — Carpet replacement: $3,000 The existing carpet in the bedrooms is worn and threadbare. Lisa replaces it with new carpet of equivalent quality.

• Classification: Repair (restoring deteriorated asset to its former condition, like-for-like)
• Tax treatment: Full $3,000 deduction this income year

Project 3 — Kitchen renovation: $15,000 Lisa renovates the kitchen: new benchtops, new cabinetry, new oven and dishwasher. The kitchen functions better than it did originally.

• Classification: Improvement (enhancing beyond original condition)
• Tax treatment: Split between Div 43 (structural work — benchtops, cabinetry fixed to wall, tiling) and Div 40 (oven and dishwasher as separate depreciating assets)
• Div 43 portion (~$10,000): $250/year deduction for 40 years
• Div 40 portion (~$5,000, across oven and dishwasher): approximately $400–500/year depending on effective lives

Total immediate deductions this year: $8,000 (roof + carpet) Annual deductions from capital works over coming years: approximately $700/year (Div 43 + Div 40 for the kitchen)

Note: Had Lisa completed the kitchen renovation in her first month of ownership to fix a pre-existing problem, the entire $15,000 would have been treated as initial repairs — capital expenditure, not immediately deductible.

Common mistakes

• Claiming initial repairs as immediate deductions. Work done to address defects that existed at the time of purchase is capital, not a deductible repair — regardless of how minor the work seems.
• Treating like-for-like replacement as an improvement. Replacing carpet with carpet, or tiles with similar tiles, is generally a repair. You do not need to claim it as a capital improvement just because it involves full replacement.
• Failing to split mixed invoices. If one job includes both repair and improvement components, you must apportion — claiming the whole amount as a repair is incorrect, as is depreciating the whole amount.
• Treating a whole-of-property renovation as a series of separate repairs. A comprehensive renovation that changes the character of the property is a capital event, even if each individual task could theoretically be described as a repair.

Key takeaways

• The repair/improvement distinction turns on one question: does the work restore the property to its original condition, or does it enhance it beyond that standard?
• Initial repairs — work done to fix defects that existed when you bought the property — are never immediately deductible, even if the work is restorative in nature.
• Mixed jobs must be apportioned; ask for itemised quotes that separate repair work from upgrade work.
• Improvements are not lost — they are depreciated over time, reducing your taxable income year after year via Division 40 or Division 43.

Sources

• ATO: Repairs and maintenance expenses
• ATO: Rental expenses you can claim
• ATO: Capital works deductions
• ATO: Rental properties guide 2025

Next step

• Model annual return in the Investment Property Calculator
• Review sale impact with the CGT Calculator