When you buy your first investment property, it can be tempting to start renovating straight away. But as Michael Sloan from The Successful Investor explains, you could be throwing money away without realising it.
Resisting the urge
It’s natural. You’ve bought an investment property that’s a bit ‘tired’ – and you immediately see things you could do to improve it.
You might want to get rid of the blinds, rip up the carpets, or feed that old dishwasher to the tip.
But the First Law of Renovation is that if you start off small, the project will quickly (and inevitably) get bigger – and you’ll throw out far more than you wanted to.
Why some renovations might not ‘add value'
While it’s easy to get carried away – it’s also a mistake.
This is because a depreciation schedule for an older property places a value on each taxable item. For example, 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. Essentially, throwing these items away is the same as throwing money away.
These items normally depreciate over a number of years. But as they're being scrapped, the full tax deduction is available in the first year.
How to ensure you don’t miss these tax allowances
Before you throw anything away, your first step is to make sure you get a depreciation schedule written up.
Track all the items you dispose of and tell your accountant. They’ll claim these tax deductions for you in your first year of ownership.
Once the renovation is complete, get another depreciation schedule done and claim depreciation on all the new items. It’s that simple.
Final tax tips
Don’t claim new items in full if they should be depreciated – it’s a sure-fire way of getting into strife with the Australian Tax Office (ATO).
It’s also important to remember that only some parts of a renovation can be claimed as depreciation.
For example, 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.
Another example is new built-in cupboards. As they are considered part of the building, they are depreciated over 40 years.
On the other hand, replacing carpet because of a hole is not considered a repair. In this case, it’s depreciated over 10 years.
For more information on what you can claim, head to the ATO's website, opens in new window.
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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 recommends seek the counsel of an independent financial advisor before making any investment decision.