An increasing number of property owners are deciding to invest in renovations to increase the value of their property. However, many Australians are still unaware of the tax benefits that can be associated with such projects.
In light of this, I've decided to share with you the following article provided by BMT Tax Depreciation, which appeared in the August 2012 edition of Century 21's Property Investor.
Australian spending on renovations hit $31 billion last year.
The current economic climate has made Australians hesitant to take on additional debt. Rather than purchasing a new home, people are investing in renovation projects on their current properties. TV shows such as 'The Block' and 'The Renovators' have become popular and are providing inspiration and ideas for home owners to improve their properties.
Property owners are often unaware of the tax deductions available to them. It is possible for Australians to claim thousands back after renovating a property which generates income. Renovations can be expensive, so it makes financial sense to take full advantage of the tax deductions available during the first five years of property ownership. As a building gets older, items wear out - they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a deduction. Depreciation can be obtained by any property owner who obtains income from their property.
Property depreciation is commonly missed because it is a non-cash deduction; owners do not have to spend money to claim it. To ensure property owners are making the most of the tax deductions available, they should consider a pre-renovation depreciation report. Old assets within a property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are replaced, the owners may be entitled to claim them as a tax deduction. A Quantity Surveyor, who is qualified to calculate values and construction costs, can ensure that owners are not throwing dollars away.
Essentially, if an item is removed or replaced as a result of a renovation, the current value of the item can be written-off as a tax deduction in the year that the expense is incurred. A Quantity Surveyor will complete a report prior to a renovation or refurbishment to identify the value of all assets within the property. A second report is then prepared after completion of the renovation, identifying the value of all new assets within the property. The removed assets can be written-off immediately.
How to maximise depreciation deductions
During renovations, when it comes to deciding which new item to install in an investment property, the depreciation potential of the new item should be considered. For example, when spending $2000 on new flooring, owners may consider the depreciation potential of different options. Depreciation deductions are also available for the structure of qualified buildings. Any construction (such as a new roof, walls or ceiling) carried out after July 18, 1985 (residential property) and July 20, 1982 (non-residential property) is eligible for the capital works allowance (Division 43). A Quantity Surveyor who specialises in tax depreciation will always take into consideration renovations carried out by previous owners as this becomes an additional tax benefit for the current owner.
Always consult a depreciation expert about an investment property's depreciation entitlements. Taking full advantage of the available tax benefits on an investment property can improve a property owner's cash flow each financial year. BMT Tax Depreciation offer obligation free advice about a property's depreciation potential pre and post renovation. Simply call 1300 728 726 to discuss any property scenario.