Home renovations can be a lucrative investment as long as you are fully aware of the full extent of your tax depreciation entitlements. Paul Bennion looks at the most important tax deductions you should be claiming when renovating.Generally speaking, investors are failing to claim their full tax entitlements, in particular around depreciation benefits. This is likely due to the fact that the range of items that can be claimed is broad and diverse.
Some of the legal, yet often neglected deductions include:
- Pumps attached to spa baths
- Free-standing spas
- Water tanks
- Built-in coffee machines
- Garden gnomes
- Children’s cubby houses
For apartment owners, some of the often ignored deductions include:
- Common areas such as car parking and recreational facilities
- Kitchens and bathrooms which are the two most popular renovation areas, accounting for approximately 60% of the total renovation budget
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Many investors do not understand that a range of items that are disposed of have a residual value. Indicative of this is that if a 20-year-old kitchen valued at $10,000 is disposed of, 20 years of depreciation still remains that can be claimed. This equates to $5,000 on the assumption it is written off at 100%. Bathrooms fall into this category and also have a depreciation life span of 40 years.
Generally, standard home renovations range between $20,000 and $50,000. Investors can claim both plant and capital works allowance in addition to the residual write-off of the disposed item. Old properties have a depreciation value. Property tax depreciation, if applied correctly, has the potential to find several thousand additional dollars in tax returns for homeowners.
Tax tips to consider when renovating
- Renovate at least 12 months after purchasing to ensure a full tax depreciation entitlement. If renovations are undertaken too soon after purchase, the tax office deems them as having no value.
- Spend money on items that have a high rate of depreciation such as white goods, carpets and window coverings.
- Retain all invoices and do not claim personal labour costs.
- Ensure the full life span of all depreciation items is claimed.
- An investment building is eligible for a 40-year depreciation based on the actual or historical construction cost. This applies to buildings constructed after 1985, however, extensions and alterations to older buildings are themselves eligible for a 40-year depreciation. This means 2.5% of the original construction cost of the new additions.
- New kitchens, bathrooms, garages, carports, patios and barbeque areas built after 1985 in older properties are depreciable.
- Swimming pools built after February 1992, are eligible for depreciation as structural improvements.
- A Tax Depreciation Schedule is only required once during the life of an investor’s ownership of an investment property.
- An excellent way to maximise tax depreciation entitlements is to engage a qualified taxation depreciation specialist.
Paul Bennion is managing director of DEPPRO.
