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Has the time come to renovate an investment property?
Thinking about the types of new fittings and fixtures before installing them may generate you thousands of dollars in depreciation deductions. Make sure you do everything to maximise the cash flow potential of your next renovation project.
Many investors purchase properties that require improvement. They usually do this with the sole purpose of renovating to create equity and generate extra rent.
Once you have decided to renovate your investment property, it is important to ensure you obtain the best long term value from the money you are outlaying. Renovations can be expensive, so it makes financial sense to obtain the maximum depreciation benefit where possible.
When it comes to deciding which new item to install in a property, some consideration should be applied to the depreciation potential of the new item.
Maximising depreciation on new items
Which new floor covering should you install to increase your depreciation potential - carpet, floating timber floorboards or tiles? The depreciation available on these items differs due to their varying effective lives.
If you spend $2000 on floor coverings, for example:
Considering ornamental light fittings or down lights?
If you spend $2000 on lighting, for example:
Deciding between an air conditioning unit and ducted air conditioning?
If you spend $5000 on cooling, for example:
(Figures based on Diminishing Value method using current legislation)
As shown in the above examples, installing assets for their depreciation potential is certainly worthwhile. Depending on the size of the property and the extent of the renovations, the deductions obtained from the new items may improve your cash flow each financial year by thousands of dollars. In many cases, renovations can be funded by the immediate ‘write off’ of old items and the depreciation deductions from the new items. In many cases, renovations can be funded by the immediate ‘write off’ of old items and the depreciation deductions from the new items.
Effective lives – Explained
The 'effective life' of an asset is used by a Quantity Surveyor to work out anasset's decline in value.
The Australian Taxation Office (ATO) describes an effective life as 'the period of time that a depreciating asset can be used by any entity to produce assessable income:
- assuming it will be subject to wear and tear at a reasonable rate,
- assuming it will be maintained in reasonably good order and condition, and
- having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.' Source: www.ato.gov.au
Depreciation deductions on structural renovations
If structural construction work is completed as part of the renovations (such as a new roof, walls or ceiling), this can also be depreciated. Any work carried out after 18 July 1985 (residential property) and 20 July 1982 (non-residential property) will be eligible to claim the capital works allowance (Division 43) as well as any plant and equipment deductions.
Renovations carried out by previous owners: Can depreciation be claimed?
When BMT Tax Depreciation completes your tax depreciation report, we always take into consideration the renovations carried out by previous owners. Even though you may not have carried out the work yourself, there may be depreciation deductions for you to claim. A thorough site inspection is undertaken on your property by a BMT Tax Depreciation staff member identifying previous renovation works. Further council searches can also expose previous renovations carried out on the property.
Always consult a depreciation expert about your entitlements. Maximising the depreciation available in your investment property may improve your cash flow position each financial year – you’ll pay less tax!
BMT Tax Depreciation can offer obligation free advice about your property’s depreciation potential pre and post renovation – simply call the office and speak to us about your property scenario.
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