It’s natural. You’ve bought an investment property that’s a bit ‘tired’ and you see a heap of things you could do right now, to improve it.
The First Law of Renovation is that if you start off small, the project will quickly (and inevitably) get bigger. And you’ll rip out far more than you intended to.
A typical list of items discarded during a renovation might include:
- the stove
- the dishwasher
- unstylish light fittings
- that venerable washing machine (which never misses a beat).
Why renovation mightn’t ‘add value’?
While it’s easy to get carried away—to think you’re auditioning for The Block — it’s also a mistake. Why? Because a depreciation schedule for an older property places a value on each taxable item. Let’s say the values look like this:
Carpet - $700
Blinds - $700
Curtains - $370
Stove - $750
Dishwasher - $500
Light fittings - $450
Washing machine - $400
TOTAL - $3,870
For a taxpayer on a 33% tax rate, their tax refund on these items is $1,277. Throwing these items away is the same as throwing money away.
Normally these items are depreciated over a number of years, but because they're being scrapped the full tax deduction is available in year one.
How to make sure you don’t miss these tax allowances
First, have a depreciation schedule done before you throw anything away, track all the items you dispose of and tell your accountant. They’ll then claim these tax deductions for you in your first year of ownership.
Secondly, get another depreciation schedule done once the renovation is complete and claim depreciation on all the new items.
I was recently talking with two clients of mine who’d bought an investment property intending to knock it down and build another in its place. I advised them to get a depreciation schedule done on the old place which identified $7,000 in tax deductions or a $2,310 tax deduction in year one. If they’d bulldozed this property as planned and trucked everything to the tip, they might as well have thrown away that $2,310 (along with the hideous curtains).
One more tip about tax
Don’t claim new items in full if they should be depreciated, as that’s a sure fire way of getting into strife with the tax office. Only some parts of a renovation can be claimed as depreciation, if you repair an item or paint the walls you can generally claim that tax deduction in year one. But if you replace an item, you must depreciate it over 40 years — or its effective life. For example, new built-in cupboards or a skylight are considered part of the building and are building costs which are depreciated over 40 years. But replacing carpet because it had a hole is not considered a repair; it’s depreciated over 10 years.
The Australian Tax Office (ATO) has more information on what you can claim.
The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommendsyou seek the counsel of an independent financial advisor before making any investment decision.