The goal of an investment property is to make money. The good news is, there are more ways to profit than just collecting rent. Brad Beer, from BMT Tax Depreciation, explains.
Kevin: There’s an old saying in life, “Happy wife, happy life.” But there’s another one, too, that you should bear in mind, and that is, “Happy tenant is going to make you a very happy landlord.”
One great way to keep your tenants happy is to look at renovating your property, continually improving it, and making it a better place to live. That’s the subject of this conversation I’m about to have with Brad Beer from BMT Tax Depreciation.
One might wonder where tax depreciation works in with renovation, Brad, but it really does have a place to play, doesn’t it?
Brad: Yes, it does. I have a few properties myself. I’ve done a lot of renovations, and it always gives you a bit more choice of tenants and helps you sometimes to get that little bit of premium out of that property. Renovating the properties has always worked pretty well for me.
Now, the claims. You buy more things within an investment property. You spend money on capital works. There’s more depreciation to claim. Definitely, you’re putting your things in there, they have value, and they’re starting to depreciate as soon as they’re in there, so there’s claims there for either the plant and equipment or those capital works that have been done.
Kevin: What are some of the big-ticket items that you can claim depreciation on that are actually going to turn the tenants on in your experience, Brad?
Brad: People walk into a house and they look at kitchens and bathrooms straightaway and go, “That’s a nice kitchen. I can see myself cooking there. Nice bathroom.” After that, if there’s paint coming off the walls or the carpet is really old or things like that, anything within a property that just makes it look old and tired or smelly or anything like that.
Even if you don’t do kitchens and bathrooms, a carpet or floating timber boards. These days they have some things that are less expensive than they use to be, and they’re also depreciable quicker. Tidying those things up and the paint really freshens a property up really easily and inexpensively.
Kevin: Yes. The lifespan of some of these items, too, like a new kitchen… For instance, if we spent $15,000 putting a new kitchen into a property, what kind of benefit can I expect over what period, Brad?
Brad: The kitchen itself is seen as a capital works deduction that must be claimed, so kitchen benches, tops, and cupboards have actually got a 40-year life, which is a long time. The things like the stove or carpets – obviously, carpets aren’t in kitchens very often – but things that are plant and equipment – range hoods – that don’t last as long, you get to claim a fair bit quicker.
Your actual kitchen itself is a fairly slow claim. However, putting a new kitchen in is also about happy tenants, better tenants who’ll pay a premium for those, and also making the house more valuable, so you have equity gain on that property.
Depreciation is not the reason to replace a new kitchen; it’s a benefit at the back end of it.
Kevin: Yes. Anything that’s going to keep the house in good repair is going to be good for its ongoing value. Interesting we talk here about renovations, Brad, because another part that I want to touch on, as well, and that is something you should do before the renovation, and that is work out about scrapping deductions. Tell me how they work?
Brad: The most important thing is to make sure you have the depreciation and things worked out before you rip it apart. Renovators call the quantity surveyor first.
Scrapping: when you decide to do some renovations, there are things within that property that probably still had some value from a depreciation aspect. Now we’ve said old properties still get deductions, so we’ll find out whether there are things there that could be claimed. Now any value that’s left, if you throw them away, instead of continuing to depreciate them, they’re an instant deduction in the year that you throw that away.
I’ve done some renovations where I’ve had $10,000 scrapping deductions before. These were things that still had value that I would have been claiming over the next five years or however long, but because I threw them away, I got an instant deduction in that year.
The important thing is to look at it before you rip it apart.
Kevin: Gee, there must be a lot of renovators or investors who just don’t understand that that money is sitting there, and they just totally waste it, Brad.
Brad: Scrapping is not the tax office term; it’s just an easy thing to understand. If we talk about claiming the residual value of items, people start to maybe fall asleep a little bit more. But if I say, “Don’t scrap and lose your money,” scrapping is an easy word to understand.
Kevin: Yes. It is, indeed. It’s always good talking to you, Brad Beer from BMT Tax Depreciation. Contact the guys through our website, of course. He is there to help you.
Brad, thanks for your time.
Brad: Thanks, Kevin. It’s always a pleasure.