Rental Properties, Natural Disasters and Insurance Payouts
We assume your property is a rental property and used for investment purposes.
Normal repairs to your rental property are tax deductions in the year they occur. A repair is “to make good” or remedy defects to the property or parts of the property. Eg: repairing a fence
If expenses go beyond repairs where you either significantly upgrade or replace an item then this is a capital expense and will have to be depreciated over 40 years. Eg: completing replacing an old fence with a new one. This is regardless of whether or not you used the same material or a very similar modern day equivalent; this is a capital expense and not a repair.
Some expenses may be a combination of both repairs and capital improvement. Replacing part of the wooden vanity cupboard due to water damaged (repair) and replacing the tiles around the vanity because they look a bit dated (capital cost). In this case you would need to get the builder to separate and itemise the two costs as repairs or improvements. Otherwise the total cost would have to be classified as improvements.
When items are completely replaced eg: the carpet in an entire room that contained some damaged carpet. This is a capital cost to be depreciated but an immediate deduction would be available for the adjusted value of the old carpet.
Any insurance payout you receive as a result of property damage should be included in your assessable income.
What happens if the entire house is destroyed?
Obviously this is more than just a repair and the entire cost is capital in nature to be treated as a new depreciable asset. The un-deducted balance of your old property is immediately deductable.
At the time the insurance payout is received, a Capital Gains Tax (CGT) event has occurred. Note: the CG may be able to be deferred in certain circumstances (Discussed below)
Four things will happen:
1.Property is destroyed; any insurance payout is treated as income.
2.Any un-deducted balance of property is immediately available as a deduction less any insurance payout. i.e: a balancing adjustment.
3.A CGT event occurs when the insurance payout is received.
4.The new property is then to be treated as a depreciable asset just like any new build.
CGT Rollover
Rollover for CGT relief is the process of deferring the payment of the CGT to when the asset is actually sold. This rollover is generally available to those who lose part or all of their property due to damage and receive compensation for the damage through an insurance policy.