It is important for those affected to understand the tax consequences of the repairs. To ensure you can claim as much of your costs as possible, owners must be aware of these crucial issues:
- The cost of travel to the property to survey destruction is deductible and includes transport, accommodation and meal expenses.
- Repair costs are deductible. However, different rules apply for the work that goes beyond restoring to the original condition. A tax deduction is allowed for the full cost of the repair within the year it is completed, while additional improvement costs will be depreciated as either a part of the building or as a separate asset.
- Demolition and cleanup costs are deductible, but the claim amount is limited to the income received from the insurance payout and any income received from selling scrap materials.
- Insurance payouts for loss of rental income are taxable, as are insurance proceeds for repairs, where repairs are undertaken.
- Interest on loans used to pay for property damage will be deductible for the life of the loan.
- Ongoing property holding costs are tax deductible while there is no rental income. However, you must intend to restore the property and then continue renting it.
There could be capital gains tax consequences where the property is completely destroyed and the insurance payout is classified as the sale of your building. It is crucial to consider this implication with an accountant as every case is different.
Individuals can also apply to the ATO to vary the PAYG tax withheld from their salary or wages, to reflect their ongoing property investment expenditure. This option is only available for periods of up to one year and a reapplication must be made each year to extend this period.