Property investors who decide to embark on a renovation are often unaware that any additions made will not only potentially add value to the property, they also can impact the deductions they can claim come tax time.
Owners of income producing properties are entitled to claim deductions in the form of depreciation for both the structural items such as walls, doors and floors in an investment property as well as for the plant and equipment assets found such as ovens, carpets, dishwashers and air-conditioning units.
When an owner removes existing structures or adds new ones, or if they remove or replace plant and equipment assets, it is important they seek expert advice from a specialist quantity surveyor before beginning the work.
There are three important points a property owner must consider when undertaking a renovation to their investment property:
- The types of items chosen can impact the future deductions which can be claimed
- Any items removed during a renovation may have remaining depreciation deductions available that the owner can claim
- The investor should arrange a tax depreciation schedule both before and after the renovation takes place
To help investors understand these three points, let’s look at an example scenario.
The owner of a ten-year old property is considering completing a renovation after having owned and rented the property for just one year.
The owner has a budget of around $25,000 to spend on new items including flooring, appliances, heating and cooling assets. They are also hoping to upgrade structural assets within the kitchen including the cupboards and bench tops.
After obtaining quotes for some of the items they are considering updating, the investor is unsure which assets would provide them the best value for money, especially when it comes to flooring, heating and cooling assets.
To help make their decision, the investor decided to consult with a specialist quantity surveyor to find out which items would provide maximum deductions to help recoup some of the costs involved in the renovation at the end of financial year when they complete their income tax return. The information they learned also helped the investor to make smart choices between items to help them stay close to their $25,000 budget.
Below is a table outlining the potential costs of new items and the first year deductions the investor could claim.
As the table demonstrates, when choosing to install flooring, the depreciation rate for carpet and vinyl is much higher than floating floors or tiles, even though the prices for these assets are cheaper for the owner. This investor therefore chose to install new carpets and vinyl in their investment property. These two assets would result in a $654 depreciation deduction in the first year alone.
To stay within their budget, rather than update all cooling and heating assets, the investor decided only to improve the existing split-system air conditioner to ducted air conditioning. By upgrading to ducted air conditioning, the owner would be entitled to claim $978 in deductions in the first year for this item, much higher than the deductions they would receive if they only considered a replacement for the existing split-system air conditioner.
The investor chose to update the kitchen cupboards and replace the old laminated bench tops with stone. Although structural assets like these must be claimed as capital works deductions and will depreciate at a lower rate than plant and equipment assets, the increased expense of these assets meant the deductions for these options were higher. Combined with the increased value these items would add to the property, the investor preferred these options over choosing only to install a new laminated bench. The existing sink was kept rather than scrapped to save money on the budget.
Appliances such as the range hood, cook top, oven and dishwasher all depreciate at much higher rates when using the diminishing value method of depreciation, so the owner decided to put a significant portion of their budget towards updating these assets.
For the $25,480 in assets the investor had chosen, the investor found they would receive a $2,217 deduction in the first year alone.
Prior to the renovation, the investor had asked their specialist quantity surveyor to complete an inspection and produce a tax depreciation schedule for the existing assets within the property. The quantity surveyor performed a site inspection taking notes, measurements and photographs of all of the existing structural items and plant and equipment items within the property.
As a result, the investor was able to claim additional deductions for any remaining depreciable value for removed assets in the year the items were removed and scrapped.
Below is a table of the existing assets the owner chose to scrap and replace, including their remaining depreciable value:
As the example shows, the owner could also recoup a significant amount of the costs involved in the renovation by claiming deductions for scrapped assets, in this case $11,574.
An updated depreciation schedule would capture the new additions and outline the deductions the investor could claim for new assets installed. The investor can also continue to claim deductions for any existing assets kept within the property for their remaining depreciable life.
The advice of a specialist quantity surveyor proved worthwhile for this investor to help make the best decisions and reduce the overall costs of this renovation. By claiming depreciation, the investor not only benefited by improving the value of their investment property, they also saved a significant amount of money.
– Bradley Beer is the managing director of BMT Tax Depreciation. A depreciation expert with over 16 years experience in property depreciation and the construction industry.