As you may be aware, there is a new law that requires all tenanted homes to be insulated by 1 July 2019. Anyone who owns rental property must ensure their properties are insulated to the required standard by this date.
At GRA we’ve been getting a lot of questions about whether the cost of insulating a rental property is tax deductible or whether it is non-deductible capital expenditure, so we thought it would be helpful to clarify.
Frist, let’s define capital versus non-capital (revenue) expenditure. Capital expenditure refers to expenses over $500 that result in improvements to a property. On the other hand, revenue expenditure is the type of work that restores a property to its original condition.
Bearing this in mind, how the cost of insulating a rental property is treated will depend on whether it is considered to be a repair or an improvement. The Commissioner of Inland Revenue discusses the treatment of expenditure on insulating residential rental properties in Interpretation Statement 12/03*. In the statement, the Commissioner concludes that:
- Expenditure on installing insulation in a property that has never been insulated is non-deductible capital expenditure, as the expenditure results in an improvement to the property and can’t be considered a repair.
- However, expenditure on replacing insulation that has deteriorated and is no longer effective is a deductible expense because the expenditure simply restores the property to its former condition.
The fact that the individual owns numerous properties does not alter the treatment of the expenditure. Whether the expenditure on insulation is deductible or not is determined by whether it restores or improves a particular property.
If you are not sure about whether or not to claim the cost of insulation as an expense, please contact your GRA Client Services Manager. Otherwise, if you are not already a GRA client we invite you to fill out our online form to request a meeting or phone us on (09) 522 7955 to see how we can help you.
Income Tax Act 2007, ss DA 1, DA 2(1).
Inland Revenue Interpretation Statement IS 12/03 Income Tax - Deductibility of Repairs and Maintenance Expenditure - General Principles, 29 June 2012.