04 Jan What you need to know before renovating an investment property
The season for renovation is upon us and making improvements to your investment property could be on your agenda.
Renovated investment properties can attract higher rental yields and better-quality tenants. But you can also use it to your advantage when it comes to maximising your returns.
BMT Tax Depreciation is Australia’s leading supplier of tax depreciation schedules. The team has shared their insights to help you make renovation decisions that will boost your after-tax cash flow for years to come.
Rules surrounding previously-used assets
Staying in an investment property while you renovate can seem like a convenient arrangement. While this is true, the long-term negative cash flow impacts far outweigh the temporary perk.
If you live in your investment property while you renovate it, your new plant and equipment assets could fall under the ‘2017 previously-used rules’. This means any new assets you install during the renovation, such as floor coverings or light fixtures and fittings, will be ineligible for depreciation.
This means you can miss out on claiming tens of thousands of dollars, even if you only lived in the property for a couple of weeks or months. For this reason, it’s recommended to live elsewhere during an investment property renovation.
Substantial vs cosmetic renovation
Properties that have undergone a substantial renovation, whether it was completed by yourself or a previous owner, are exempt from 2017 legislation changes.
For example, if you purchased a second-hand property in 2018 then completed a substantial renovation on it, you can claim all available plant and equipment and capital works deductions.
But how do you tell the difference between a cosmetic and substantial renovation?
Cosmetic renovations are generally visual in nature and cost effective,in comparison to a structural renovation. Some common examples of cosmetic renovations include retiling a bathroom or installing new carpet and kitchen benchtops.
Whereas substantial renovations are more structural in nature and on a larger scale. The Australain Tax Office (ATO) identifies substantial renovations as where all, or substantially all, of a property is removed or replaced. This includes removing or replacing foundations, external walls, interior supporting walls, floors, roofing or staircases.
Determining whether a renovation is classed as ‘substantial’ is concluded on a case-by-case basis. This means you can’t simply replace an internal supporting wall and then claim all previously-used assets.
You can still claim depreciation on the removed assets
Sometimes, an asset is removed from a property before you have claimed the total depreciable amount from it. This is often seen for fixed fittings and fixtures such as built-in cupboards and windows that are claimed using capital works deductions over forty years.
When you remove an asset that still holds depreciable value, you can claim what’s called ‘scrapped deductions’ immediately. The amount of scrapped deductions you can claim is equal to the un-deducted depreciable value. For example, if you removed tiles that still held a depreciable value of $1,500, you can claim this whole amount as an instant deduction in the year of removal.
Not everything is claimed with depreciation
The rule of thumb is that any improvement or new asset must be claimed using depreciation deductions over several years. However, some expenses you make during a renovation can be claimed instantly if they class as repairs and maintenance.
Repairs must be directly related to wear and tear, or other damage that occurred due to renting the property out. Some examples includes replacing glass in cracked windows or replacing part of a rusted gutter.
While maintenance takes place to prevent damage or fix existing deterioration. Common maintenance work that occurs during cosmetic renovations include repainting faded or damaged interior walls and maintaining the property’s plumbing system.
Start claiming the most depreciation possible following your renovation with a BMT Tax Depreciation Schedule. For over twenty years, BMT has helped hundreds of thousands of investors maximise cash and improve their investment returns by claiming maximum deductions.
To learn more about BMT and the additional services they offer, contact the team on 1300 728 726 or Request a Quote.