Investment property renovations hold the potential not just to improve rental returns and attract quality tenants, but to boost cash flow by tens of thousands of dollars in just a few short years. This is because investment property renovations can make significant changes to the future depreciation claims available from the property.
In this article we will examine:
- Substantial versus cosmetic renovations
- Substantial renovations in the depreciation landscape
- Common questions we receive from investors
Substantial versus cosmetic renovations
In all our work, we define a substantial renovation using the Australian Taxation Office’s (ATO) definition of substantial renovations: “In which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal or replacement of foundations, external walls, interior supporting walls, floors, roof or staircases”.
In contrast, cosmetic renovations are generally visual in nature or focus on a specific area of the property. Common examples include painting walls, replacing window coverings and completing a kitchen renovation.
Depreciating cosmetic renovations can provide significant boosts to cash flow but it’s key to ensure they are identified correctly. All too often, investors mistakenly report cosmetic improvements following damage and don’t claim them as repairs or maintenance – meaning they are potentially missing out on an immediate deduction.
Substantial renovations in the depreciation landscape
Substantial renovations have the ability to boost the investor’s eligibility for thousands in depreciation deductions.
Once any renovation has been completed, depreciation deductions can be claimed on eligible capital works, new plant and equipment assets and the un-deducted value of removed assets by the current owner.
When an investor purchases an unused property directly after it has been substantially renovated, they can also still claim all eligible capital works and the plant and equipment assets. This is despite the fact that the property is technically second hand.
Throughout the BMT process we ensure that every substantial renovation is identified, the schedule reflects improvements made, and legislative requirements are met to maintain claim compliance. Especially relating to the 2017 depreciation amendments under Section 40-27 of the ITAA97.
Common questions we receive from investors
A tax depreciation schedule should always be completed following a substantial renovation. Here are some common questions we receive prior to preparing these types of schedules.
Q. I am completing an extensive renovation on my property, but how do I know if it is classed as substantial?
As a general rule of thumb, any complete structural renovation that requires building approval usually falls under the ‘substantially renovated’ category.
If most of the building will be removed and replaced, leaving behind the structural component, the renovation will usually be substantial.
Q. My investment property kitchen was substantially renovated but the rest of the property remained unchanged. Can I still claim all plant and equipment deductions?
If you replaced the kitchen yourself the answer is yes. But if you purchased the investment property after the renovation, no. Only substantially renovating part of a property while the majority remains unchanged doesn’t support the ATO’s requirements of substantial renovations.
However, it is usually worthwhile to have the property’s tax deprecation schedule assessed to see if there are any qualifying assets or structure. BMT Tax Depreciation will do this assessment free of charge before starting any work.
We all have a role to play when educating investors about the benefits of depreciating property and how it can boost their cash flows. To learn more about how we partner with accountants Australia wide, visit our accountants information page.