Renovation is an essential aspect of maintaining and improving a property, but it is not always done for the looks alone. Many property investors opt for renovation before selling or renting the property to another party. But what is often missed is the possible tax claims from renovation, like building tax depreciation. In Australia, renovation costs can be claimed, but there are specific scenarios.
Here is what you must know about renovation and tax claims:
Renovating a Personal Property
Let’s start with the simplest case: you are renovating your primary residence. Since it is a property for personal use and not as a commercial one, this automatically excludes several tax deductions like depreciation. However, if you choose to sell the property later, all renovations carried out in the home are exempted from capital gains tax (CGT). The ATO also allows for renovations on areas adjacent to the primary property (like swimming pool) as long as the total area is less than two hectares. This too is exempted from CGT.
Renovating an Investment Property
Things are different in the case of investment properties. Perhaps the most important distinction is in depreciation. The ATO allows investment property owners to claim depreciation deductions over the cost of general wear and tear that occurs within the property. Now you might be thinking, can you claim depreciation on a rental property? Yes, you can. There are two types of depreciation deductions: the structural components under capital work deductions, and equipment assets installed within the property.
However, there is a very important caveat to this. As per the 2017 legislation, depreciation cannot be claimed in the case of second-hand properties. If you are renovating your property while living in it, and later renting it out, everything within it would be considered second-hand. Even the new equipment installed during a renovation would now be excluded from depreciation deductions. It is therefore imperative to ensure that you are not living in the investment property while carrying out the renovations. Not only this, but the property should also be listed as “for rent” before you actually being the renovations.
The 2017 legislation does offer some exceptions. For instance, rental properties that have undergone a ‘significant’ renovation are exempted from being treated as second-hand when sold. Most importantly, new properties remain unaffected and offer the most significant tax deductions.
‘Scrapping’ During Renovation
Scrapping refers to the removal of assets that are considered depreciable. This includes faucets, carpets, cupboards, etc. During the renovation, most property owners are focussed on claiming depreciation on a rental property and don’t care much about the old assets which are being discarded. However, this is a mistake. The ATO allows investment property owners to claim the depreciation cost of certain items as tax deductions. This means that you could claim the depreciation of the old items you have removed from your property in the same year as the renovation.
Renovation can change the entire appearance of your property, but it also carries some importance for the state of your finances. Carrying out renovations with the right knowledge from Deppro Perth can allow you to save a significant amount of money.