Substantial renovations offer investors with huge tax benefit, experts say

By Gerv Tacadena | 05 Oct 2021

Depreciation is one of the key selling points for property investors as it could provide a substantial amount of deductions.

Property investors are advised to take advantage of depreciation as a key selling point, experts say.

BMT CEO Bradley Beer said properties that are substantially renovated qualify for "particularly strong" depreciation deductions.

"This can include removing or replacing foundations, external walls, interior supporting walls, floors, roof, or staircases. When combined, these would directly affect most rooms within a property," Mr Beer said.

Investors who buy substantially renovated properties can claim depreciation on plant and equipment assets installed during the renovation.

This is not applicable for most second-hand investment properties.

"Because both plant and equipment and capital works depreciation of substantially renovated properties can be claimed, it makes them even more attractive to the buyer," Mr Beer said.

"Reducing tax liabilities will be part of an investor’s strategy and with these schedules the outcome will be fantastic for the new owners."

In a guide published last year, Your Investment Property asked H&R BLOCK's Mark Chapman about the claims property investors can make during tax time.

"In addition to interest relating to the property acquisition, you can also claim a deduction for interest on loans taken out to: carry out renovations; purchase depreciating assets — for example, furniture; make repairs or carry out maintenance; or purchase land on which a property is to be built," Mr Chapman said at the time.

When making depreciation claims, Mr Chapman said it is crucial to consult a quantity surveyor to ensure accuracy and prevent miscalculations.

"Depreciation is generally one of the larger deductions, it is difficult to work out correctly, and many homeowners miss out on potential deductions by incorrectly claiming.”

ATO poses a warning

The Australian Taxation Office (ATO) recently warned property investors "not to bet against housing".

ATO Assistant Commissioner Tim Loh said investors should declare all their income, including any capital gains from selling an investment property.

"To put it simply, you should expect tax consequences for any property that you earn income from that isn’t your main residence," Mr Loh said.

Mr Loh also reminded investors about making claims on capital works, saying immediate claims for the full amount for capital works are usually rejected.

"The cost of repairs for wear and tear to the property are deductible immediately if they are to replace or fix existing items, such as curtains, without upgrading them," he said.

"However, improvements or capital expenses, such as a kitchen renovation are not deductible immediately.

“We also see taxpayers claiming capital works, as a lump sum rather than spreading the cost over a number of years."

Over the financial year 2019 to 2020, 1.8 million Australians owned rental properties and claimed $38bn in deductions.

Photo by Bidvine on Pexels.

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