Tax Q&A: Your Tax Questions on Tax Renovation Costs, Answered

By
06/07/2017

Our tax experts are on hand to answer any tax queries you may have regarding your property investments and wealth creation strategiesEmail your tax questions to - editor.yipmag@keymedia.com.au.

Q:
I’ve just completed my second property renovation. The first one was a huge learning curve, but after I sold it I walked away with a $70,000 profit. 

This time I spent around $15,000 renovating, and though initially I was going to sell it, I have now decided to rent it out as the cash flow is much better than I expected.

I was complaining to a friend recently that it’s frustrating I can’t claim any renovation costs on my tax, and she mentioned I might be able to get some benefits through depreciation. I never got a schedule done on this property as the home was 20 years old – is it worth getting a schedule done now that it’s been renovated? What kind of return could I get?
Thank you, Michael.

A: First and foremost, it is always recommended that you contact a specialist quantity surveyor to discuss whether it would be beneficial to arrange a depreciation schedule for an income-producing property. I usually recommend doing so immediately on settlement of the purchase to ensure the owner receives the maximum deductions available. There is a risk of potentially missing out on maximising your claim if a schedule is delayed, as the ATO only allows investors to amend the previous two years’ tax returns.

“If the property was income-producing prior to the renovation ... [this may] warrant further deductions”

Even whena property is older, there are usually enough deductions available for a schedule to be worthwhile. In fact, during the 2015/16 financial year, 22.3% of investors who organised a BMT Tax Depreciation schedule did so for a property constructed prior to 1987. On average, these investors were able to claim a first-year deduction of $4,899. 

Renovations tend to confuse investors even further when it comes to working out what depreciation they can claim, particularly if the property hasn’t been income-producing for a period of time or was previously a primary place of residence before being rented out. Here are a few simple rules to be aware of when it comes to renovations and depreciation:

1. Any renovation work which has been completed on a property by a previous owner could entitle you to depreciation deductions.

2. If you are planning a renovation of an income-producing property, it is recommended that you consult with a quantity surveyor prior to starting any work.

3. Once a renovation is completed, any new structures and assets installed will result in depreciation deductions.

In your specific scenario, it’s difficult to put an exact dollar figure on the deductions without further inspection of the work completed and of the property itself. But, generally speaking, a $15,000 renovation would typically result in around $2,000 in deductions in the first year. 

Owners can also claim capital works on the original building structure for a maximum of 40 years. If the property is 20 years old, there are still 20 years’ worth of capital works deductions available. For a small house this would be around $2,000–$3,000 in capital works per year. 

Finally, you will be able to claim depreciation of any of the existing plant and equipment assets found on the property. These items are depreciated based on an individual effective life provided by the ATO. Examples include carpets, hot water systems, fans, air conditioners and garbage bins. Any newly installed plant and equipment assets can also be added to this claim.

If the property was income-producing prior to the renovation and you have records or photographs of any structures or assets removed, this could be useful for your quantity surveyor. It is preferred that you complete a schedule prior to commencing work, as removed items can entitle investors to claim what is known as scrapping. Scrapping allows investors to write off any remaining depreciable value for removed items in the year of the items’ removal. However, if there are adequate records then there may still be enough evidence to warrant further deductions in this area also.


Bradley Beer is the CEO of BMT Tax Depreciation.
He has expertise in property depreciation and is a regular keynote speaker and presenter nationwide.



While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

 

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