A Tax Depreciation blog by Paul Bennion.
Last financial year (2015/2016) Australians spent a record $7.7 billion on home renovations according to the latest ABS figures.
This represents a jump of $1 billion in home renovations spending over the previous two financial years. Back in 2013/2014, national expenditure on home renovations totalled $6.7 billon.
Overall, Australians are now spending on average $150 million every week on home renovations.
This trend is set to continue with falling interest rates making it even more affordable for property owners to undertake home renovations.
In particular, high property prices in areas such as Melbourne Sydney has encouraging more investment property owners to renovate their existing properties rather than upgrade to a more expensive home.
With the median price of a home in Sydney now at around $1 million, it has made financial sense for property owners in more affordable areas of the city to renovate rather than upgrade.
The same trend is also apparent in Melbourne where the median house price is approaching $750,000. Rising equity levels in Melbourne homes has also encouraged many property owners to renovate. During the last financial year, the median price of home in Melbourne surged by 7.4% which was the highest capital growth increase recorded by any capital city in Australia.
In addition to this trend, DEPPRO has found that during the last year there has been an upswing activity by investors who are taking advantage of low interest rates to purchase properties for renovation purposes.
Typically, these investors plan to renovate the properties with a view to either sell them in the short term at an enhanced profit or keep them long term and boost rental returns through these renovations.
While home renovations can be a great way for investors to make money through property investment, they still need to do their homework before undertaking such as enterprise.
One trap is for property investors to overspend on renovations because they become emotionally with the property.
As a result, they risk over-capitalizing the property which is one of the most common mistakes in real estate.
The danger with home renovations is that the investors can spend thousands of dollars improving their home only to find that when they sell their property, they cannot recover the money they spent.
In addition, many property investors fail to claim their full tax benefits relating to home renovations.
Unfortunately, many investors throw out many items without understanding that they may claim tax benefits on these materials at 100% of its written down value in the year of disposal.
A typical amount spent on a home renovation can range from $30,000 to $60,000 for a basic refurbishment. However, an investor can qualify for both plant and capital works allowance as a tax deduction and the residual write off of the disposed item through tax depreciation benefits.
To qualify for these tax generous benefits, investors have to undertake a depreciation schedule for the investment property as near as to the date of purchase as possible.