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Rental Properties - Replacement of Items

Replacement items in rental properties must be classified as either repairs (immediately deductible) or capital, with full replacements typically treated as capital (depreciating assets or capital works) and claimed over time.

1. Overview

When an item is replaced in a rental property, the tax treatment depends on what is being replaced and how.

Key questions:

Is this a repair (immediate deduction) or capital in nature (claimed over time)?

If it is capital in nature, which category does the replacement fall into? (explained further in the article below): 

  • Depreciating asset

  • Capital works 

2. Categories of Replacement Expenditure

(a) Repairs and Maintenance (Immediate Deduction)

Repairs restore something to its original condition without replacing the whole item.

✅ Immediately deductible
(ATO: Rental expenses – repairs and maintenance)

Examples:

  • Fixing part of a fence

  • Repairing a broken oven component

  • Replacing a few damaged tiles

🔢 How to calculate the deduction (Repairs)

Repairs are simple:

Deduction = full cost in the year incurred

Example:

  • Fence repair: $800
    👉 Claim $800 in full in that income year

(b) Capital (Depreciating Asset – Plant & Equipment)

These are separate, identifiable items with a limited effective life that are not part of the building.

Examples:

  • Curtains

  • Carpets

  • Appliances

  • Hot water systems

(ATO: Rental expenses – depreciating assets)

👉 If replaced entirely, they are:

Capital (depreciating assets) → claimed over time as decline in value (Division 40)

🔢 How to calculate the decline in value deduction (Depreciating Asset)

You must:

  1. Determine cost

  2. Determine effective life (ATO guidance)

  3. Choose a method:

    • Prime cost (straight line), or

    • Diminishing value

Example – Curtains (> $300)

  • Cost: $1,200

  • Effective life: 10 years (ATO recommendation)

  • Method: Prime cost

Formula:

Deduction= 1,200÷10=120 per year

👉 Claim $120 per year

💡 Important note:

(c) Capital Works (Building Improvements)

Capital works = structural or permanent improvements to the building

(ATO: Capital works deductions / capital expenses)

✅ What counts as capital works?

Items that are:

  • Fixed to the building

  • Part of the structure

  • Not easily removable

Examples:

  • Kitchen cupboards and benches

  • Built-in wardrobes

  • Walls, ceilings, doors

  • Tiling, roofing, plumbing systems

  • Bathroom or kitchen renovations

❗ Replacement vs repair (critical distinction)

Scenario Treatment
Replace a few cupboard doors Repair
Replace entire kitchen Capital works
Patch wall Repair
Rebuild wall Capital works

🔢 How to calculate the deduction (Capital Works)

Where there is uncertainty around the construction cost of capital works, a quantity surveyor should be used to value the asset. See our article here on quantity surveyor valuations. 

Capital work deductions are claimed at a fixed rate:

Generally 2.5% or 4% of construction cost per year (over 40 or 25 years, respectively) - depending on the type of works, see the below link for detail. 

(ATO - Capital Works Deductions)

NOTE: Some capital works are not deductible, refer to guidance. 

 

Example – Kitchen Renovation

  • Construction cost: $20,000

  • Rate: 2.5% (ATO determined)

Formula:

Deduction= Cost×2.5%=$20,000×2.5%=500

👉 Claim $500 per year for 40 years

💡 Important notes:

  • Applies only to eligible construction (generally post-1987)

  • Starts when property is available for rent

 

3. “Capital in Nature” – Clarified

An expense is capital in nature if it:

  • Replaces the entirety of an asset

  • Improves or upgrades the property

  • Creates something new

  • Relates to the building structure

⚠️ Important distinction

There are two types of capital:

  1. Capital (Depreciating Asset)
    → plant & equipment (Division 40)

  2. Capital Works
    → building/structure (Division 43)

👉 Both are:

  • Not immediately deductible

  • Claimed over time

4. 2017 Rule Change (Depreciating Assets Only)

From 1 July 2017:

❌ Individuals generally cannot claim depreciation on second-hand depreciating assets
(ATO: Second-hand depreciating assets)

What is a “second-hand depreciating asset”?

An asset that:

  • Was already used by someone else, OR

  • Was in the property when purchased, OR

  • Was previously used privately

What can still be claimed?

✅ New assets you purchase and install
✅ Assets in new/substantially renovated properties
✅ Grandfathered assets (pre-9 May 2017)

Quick example

  • Buy property with existing carpet → ❌ no deduction

  • Install new carpet → ✅ depreciable

5. Practical Framework for Replacement Items

When reviewing a replacement:

Step 1 – Entire item or part?

  • Part → repair

  • Whole → capital

Step 2 – Type of capital?

  • Freestanding item → Capital (depreciating asset)

  • Structural → Capital works

Step 3 – New or second-hand?

  • New → depreciable

  • Second-hand → generally not deductible

Step 4 – Improvement?

  • Better or upgraded → capital

 

7. Key Takeaways

  • Replacement usually = capital (not repair)

  • Repairs → immediate deduction

  • Capital (depreciating assets) → claim over effective life

  • Capital works → typically claimed at 2.5% or 4% (over 40 or 25 years)

  • Post-2017 → no depreciation on second-hand assets