Can I claim expenses incurred during renovating?

Question from Allan updated on 15th October 2009:

I own a rental property but have not had tenants in it for the last two and a half years because I decided to fully refurbish the house after the last tenants left. This task has taken a great deal more time than I had anticipated, mainly due to unexpected family problems. My question is this - can I claim back expenses incurred during the upgrade process - in the absence of tenants? I have kept all the receipts for decorating consumables, new flooring and so on.

Our expert Mark Withers responded:

The costs associated with the refubishment are almost certainly capital in nature and non deductible. The question regarding holding costs during the renovation period is less certain. If the property is owned by a non LAQC company there is an automatic deduction for interest. If not, there must be a link between the costs and the earning of income. It may be possible to mount an argument for a deduction because the property will be available for rent in a future income year.

However ..... Case J26 found that an industrial building that was acquired to turn into a residential building did not convey the ability to deduct holding costs as no income was being generated. This case was a little different though because the redevelopment never actually took place and no income eventuated. It is also possible that the interest on the money borrowed to renovate could simply be viewed by IRD as an additional cost of renovation and accordingly be considered capital.

I'm also a bit worried that your two and a half year time to renovate does make it harder to argue for the deductible outcome. The delays aren't exactly conducive to arguing that income is immanent.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.



Search the Ask an Expert archive

Browse all questions in the Ask An Expert Archive »

Site by PHP Developer