Here are some tips from the Branson’s team about what tax time means for investment property repairs, extensions, renovations and more.
Claiming tax deductions on renovations to your investments can save you a lot of dollars, but there are many tips, tricks & traps you should be made aware of before you meet with your tax agent.
For first-time property investors, knowing the difference between deductions for capital works and depreciating assets is a good starting point.
The ATO will allow you to claim ‘capital works deductions’ for the construction costs of buildings, alterations, extensions (this includes bathroom and kitchen renos) or structural improvements such as a gazebo, deck, carport or retaining walls etc. These type of deductions are claimed at the rate of 2.5 per cent (usually) in the 40 years following construction, as materials such as bricks, concrete and windows are deemed to retain their worth longer.
However, deductions can only be claimed if the property was built after 17 July 1985.
Depreciating assets, also known as plant and equipment, are the parts of your investment property that the ATO deem to deteriorate quickly – such as dishwashers, ovens, dryers, air-conditioning units, carpets and blinds.
You will be able to claim a deduction based upon the effective life of each item, regardless of the date the property was built. Each item will have its own effective life span.
We separate the fact from fiction when it comes to tax time building deductions:
Timing is crucial– Fact
You are only able to claim deductions for the period that the property is rented, or is actually available for rent.
For example, if you purchased an investment property and had a tenant for a six month period – at the end of this time, you renovated the property and then moved in afterwards yourself. You would not be able to claim the removal of those items. It has to be an investment property again once you have completed the renovations.
You have to rent out a property for a six-month period to claim deductions – Fiction!
There’s no minimum time frame. If a tenant was in place for one month after settlement and there’s a current lease, you can still renovate and deductions would apply, as long as it is income producing or available to be rented out.
You can claim depreciation even before you start a renovation – Fact!
This is very much true, assuming the property was built after 1985 and it has been leased out.
Get in touch with a quantity surveyor prior to the renovation who will assess the value of what is about to be removed and write this amount off. The amount can be surprisingly substantial in most cases.
You can’t claim depreciation on renovations carried out by a previous owner – Fiction!
You are able to claim the depreciation as if you have done the renovations yourself, including properties built before 1985.
If I was to buy a property that had a 100-year-old structure but internally a new kitchen and bathroom were put in two years ago, the 40-year life expectancy starts from the completion of those renovations. If you don’t know the timing of the renovations, a quantity surveyor will be able to help you out.
There is a big difference between renovations and repairs and maintenance – BIG Fact!
You can claim a deduction for the costs you pay to repair and maintain your rental property, in the year you pay them. Some people find it difficult to work out the difference between repairs and capital works.
To help clarify, here are some examples:
A REPAIR means: You fix five missing or broken palings on a timber fence.
CAPITAL WORKS means: You replace the whole fence.
Hot Water Systems:
A REPAIR means: A plumber fixes a valve on a hot water system.CAPITAL WORKS means: The plumber replaces the whole hot water system.
For all your investment property renovation supplies, contact our friendly team at Bransons.