Undertaking home renovations doesn’t always have to be because the area needs a refresh. Engaging in the makeover process could be for purely financial reasons. In fact, more property investors are seeking to improve capital values and increase rental income through renovation instead of purchasing a new home or building.
Many investors are aware that property works can increase rental income and subsequently boost cash flow. However, many renovators may be missing out on thousands of dollars by failing to claim depreciation deductions. With this in mind, it’s important for all renovators to understand the tax implications and deductions associated with this kind of work.
Home renovations and tax deductions
Firstly, it’s worth noting that many, if not all, residential properties have significant depreciable value. This can be claimed prior to the beginning of any refurbishments or after the job is completed.
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The Australian Tax Office does allow owners of income-producing properties to claim depreciation deductions for natural wear and tear that occurs to buildings and assets over time.
Reductions can be claimed for a building’s structure via capital works, as well as for the plant and equipment assets that are contained within the house. Importantly, capital works can be claimed in both new and old residential houses while plant and equipment subtractions are limited to new properties. If you’re an American citizen living in Australia, here is a tax guide that will help you clear up what taxes you may need to file.
To make sure you’re on the right track, a specialist “Quantity Surveyor ” should be engaged before any work commences. This is due to the fact that there may be substantial devaluation discounts available for any structural elements that are being removed during the restoration process. The official term for this process is scrapping.
Put simply, scrapping allows you to claim any decreases in value as a deduction for the residual value of removed assets in the year the items are removed. To take advantage of this, a devaluation schedule must be arranged both before and after the works take place.
The pre-renovation schedule will detail asset values while also doubling as evidence in the event of an audit conducted by the Australian Taxation Office.
Once the makeover process begins, a Quantity Surveyor will compile an itemized schedule which will go into detail in regards to any devaluation discounts available for the brand-new plant and equipment assets, along with capital improvements.
This timeline will also show the un-deducted value of the removed structural assets. This will be to the benefit of the investor’s own paperwork.
Legislation for property investors
When it comes to being a property investor and benefiting from government schemes, it’s important to stay up to date with the relevant legislation and guidelines, as well as your tax obligations.
As such, investors who purchase second-hand residential homes after 7:30 pm on the 9th of May 2017 are not able to claim a scrapping discount for existing plant and equipment assets.
However, exchanges prior to this date should be discussed in conjunction with a Quantity Surveyor in order to deem eligibility for any residual reductions that may apply to your specific case.
If you are to live in the rental premises while renovating, any newly installed assets will be classed as previously used. As such, you will be at risk of losing any associated levy benefits.
Unless there is a viable reason, investors who are looking to install new plant and equipment assets should make any additions once the dwelling has been listed for rent. This will ensure eligibility to claim the maximum available depreciation discounts.
Maximizing renovation profits
Completing works on a dwelling is a great way to garner extra cash flow. By modernizing the bathroom, replacing cabinets in the kitchen, optimizing the floor plan, and giving the exterior a fresh coat of paint, you could command a higher rent.
However, renovators might find that they are missing out on further savings. Instead of knocking down walls and opening paint tins straight away, taking the time to look at government schemes and initiatives could save you in the long run.
By taking the time to do the research and understand eligibility requirements, any refurbishment work truly becomes a win-win. For the investor, the premises command more in terms of market value. For the renter, the home environment is nicer to live in.