A Property blog by Paul Bennion.

The growing popularity of home renovations in Melbourne is highlighted by the latest ABS figures on building approvals which show that during the first nine months of this financial year Melbourne residents spent $1.39 billion on home renovations.

Overall, the value of building approvals for home renovations in Victoria topped 1.75 billion during the nine months ending March 2015. Melbourne accounted for the vast proportion of this home renovations expenditure with Melbourne residents now spending more than $150 million each month on home renovations.

Rising property prices in Melbourne over recent years is encouraging more property owners in older areas of the city to undertake home renovations as their land values have risen strongly.

Property investors, in particular, have become more active in the Melbourne home renovations market during the last few years as they seek to boost rental returns through the renovation of older properties.

However, DEPPRO is finding that many investors do not understand that they can qualify for significant tax benefits when undertaking a home renovation on their investment property.

Typically, investors are buying older properties and undertaking renovations to kitchens, bathrooms with a view to either quickly sell the property for profit or to make the property more attractive to tenants and boost the rental returns.

DEPPRO is finding that common refurbishments to these investment properties include renovations to kitchens and bathrooms, which account for around 60% of the budget, with the remaining 40% being spent on lounge, family and bedrooms which would include floor coverings and repainting.

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 ranges from $20,000 to $50,000 for a basic refurbishment and the investor can qualify for both plant and capital works allowance as a tax deduction and the residual write off of the disposed item.

However, to qualify for these tax benefits, the investors have to undertake a depreciation schedule for the property as near as to the date of purchase as possible.

The depreciation schedule will provide the Tax Office with a ‘physical snapshot’ of the property and the schedule will itemize all of the fixtures in the property that can be depreciated for tax purposes.

The depreciation schedule undertaken at the time of purchase also means that the investor could still qualify for depreciation on many of the existing fixtures in the property providing the investor intends on keeping those existing fixtures/items and waits for a reasonable time to begin renovations. Many people do not realise that older properties still maintain substantial allowance in plant and equipment regardless of their age.

For example, a property that is more than 50 years of age could still qualify for thousands of dollars each year in tax depreciation benefits for the owner.

Anyone who has purchased an older property for investment purposes should therefore carefully consider the significant taxation benefits that can be achieved before beginning any construction work.