Expert Advice with Tyron Hyde
What can you depreciate when you renovate a property?
Renovating a property is one strategy that can increase your property’s value, and eventually your profit – not to mention the positive impact it can have on your tax depreciation entitlements. When you carry out renovation work on an investment property, you are entitled to make depreciation claims for certain parts and aspects of the property.
Firstly, depreciation can be claimed on the construction costs of yourrenovation project.Examples include new kitchen cupboards, bathroom tiling, oreven a new toilet. In addition, you can claimdepreciation on upgrades to property,plant and equipment items,such as a new oven, dishwasher, curtains and blinds.
What are the most common mistakes investors make when renovating (before and after)?
Most investors are keen to improve second-hand property upon its purchase,andtheyfocus all of their energy and attention onthe execution of the renovation work.
More often than not, these investors are inclined to adopt the mindset,“The faster the completion, the sooner the returns”.
While this is not entirely false, itcan be a classic example of the ‘haste makes waste’ concept. In a rush to get the desired outcome, most investors are not aware that they are missing out on gains they could be making, even while they are still in the process of carrying out their final plan for the property.
Let us discuss the common mistakes investors make before renovating a newly bought pre-owned property:
1. Immediately discarding items that can be claimed as depreciation assets
It is easy for old and used carpets, blinds, curtains, stoves, dishwashers and light fittings to present themselves as obsolete and no longer valuable when a property upgrade is the first thing on your mind. But while these obsolete items may no longer be useable, thisdoes not mean they cannot be claimed as a tax deduction.
Each of these taxable items can actually be assigned a value that can be claimed as a deduction against the investor’s tax. A deduction from tax is considered to be money gained. When investors discard these items, they are also indirectly discarding money. In cases where the items can no longer be recovered from disposal, photographic representation may suffice,with the help of a quantity surveyor.
2. Failing to obtain a depreciation schedule on the old property and its items
Instead of throwing old items away before renovating, conduct an inspection with your quantity surveyor to identify the original value of each item. These values are the basis of the tax deductions you can get by the end of your first year as the new owner of the property. Without these values, no tax deduction can be calculated in the first place.
3. Not having another depreciation schedule done upon completion of renovation
The depreciation schedule that you got for your pre-renovated property is intended to back up your depreciation claims on its old and existing assets. This depreciation schedule does not cover the new assets installed on your property as part of the renovation. For this purpose, a new depreciation schedule is required.
4. Claiming new replacement items at onceand in full
Don’t get too excited once you have renovated and think that whatever you have installed can now be written off immediately. A new item, such asacarpet, has to be depreciated over its effective life, or the timeframe specified for the said item to last before it needs to be replaced. More often than not, claiming new items in full can create problems for you with the ATO, except where the work is considered a repair – but that’s a whole different tax article!
What is the ’scrapping method’, and how does it affect the depreciation deductions for your property?
‘Scrapping’is what the industry calls the process of discarding plant or equipment and/or capital works items that areno longer needed within your investment property.
More often than not, these items still have a residual value that can be claimed by the owner, provided the use of the item prior to being scrapped was to generate income.
When seen from the vantage point of depreciation, scrapping can be financially advantageous as it may yield claims as high as 100% of the residual value of an asset. The enormous benefit of scrapping is evident when you notice that it results inas many deductions as the brand new asset’s initial year.
Just remember– in order for you to claim the residual value of the item, the item needs to be income-producing prior to being ripped out, and the property needs to be income-producing after the renovation has occurred.
Tyron Hyde is the CEO of Washington Brown and is considered one of Australia’s leading experts in property tax depreciation. He is also a registered tax agent. Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually. For a depreciation schedule quote CLICK HERE and follow the 3 simple steps or estimate your depreciation cost for Washington Brown’s online calculator CLICK HERE.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.