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Cosmetic or substantial renovation? Tax implications

BMT team — Tue, 29 Oct 2019 22:09:51 +0000

Australian property investors are increasingly undertaking both substantial and cosmetic renovations to increase property values. Renovations were up 11 per cent this year according to Master Builders Australia, with chief economist Shane Garrett stating, “Australia’s home renovations sector enjoyed its busiest quarter in 14 years during the three months to September 2018”. Let’s look at the difference between a substantial renovation and a cosmetic renovation and the tax implications for owners of investment properties. In this article we will answer: What is a substantial renovation? What is a cosmetic renovation? What are the rules affecting second-hand property owners? What is a substantial renovation? According to the Australian Taxation Office (ATO), substantial renovations occur where ‘all, or substantially all, of a building is removed or is replaced’. This includes removing or replacing ‘foundations, external walls, interior supporting walls, floors, roof or staircases’. When combined, these would directly affect most rooms within a property. If you’re undertaking any structural work that requires building approval, or moving doors and walls, the renovations would likely be categorised as structural in nature. If a property was substantially renovated by previous owners prior to selling and renovations remained unused, property investors can claim depreciation on the new plant and equipment assets installed by the previous owner, as well as any newly installed or qualifying capital works deductions available. With substantial renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What is a cosmetic renovation? Cosmetic renovations are generally visual in nature and more cost effective than their structural counterparts. Examples of cosmetic renovations can include painting, patching up minor wall cracks, adding new carpet, replacing hardware like door handles, adding a letterbox to the front of a house or changing light fittings. Undertaking a cosmetic renovation is a good way to improve a property without incurring the expense of undertaking a substantial renovation, but it’s important to understand the differences and know what you can claim. With cosmetic renovations, the following applies: Investors who do not live in the property during renovations can claim on work they complete themselves Investors can claim on capital works renovations Investors can’t claim on existing plant and equipment installed by the previous owner Investors who live in the property while renovating can only claim on capital works improvements once the property is income producing What are the rules affecting second-hand property owners? Following depreciation legislation changes in 2017, restrictions have affected the ability of property investors to claim tax depreciation deductions on previously used plant and equipment assets. Second-hand residential properties purchased after 7:30pm on the 9th May 2017 are not able to claim depreciation deductions for existing plant and equipment assets as they are deemed by the ATO to have been ‘previously used’. There are some exceptions to this rule which include: Commercial properties which are unaffected New properties which have never been lived in Properties where contracts exchanged before 9 May 2017 and haven’t been lived in by the owner after 30 June 2017 Substantially renovated properties Most properties have had some work completed that a current owner can claim. It’s always worth contacting a specialist Quantity Surveyor to find out how much you’re entitled to. A BMT Tax Depreciation Schedule outlines all the deductions you can claim for your property. The schedule lasts for forty years and the fee is 100 per cent tax deductible. In the FY 2018-19, BMT found our clients an average of almost $9,000 in first-year tax deductions for all residential properties. For those with properties directly affected by the 2017 legislation changes, we still found an average of $5,641 in deductions per year. There are benefits in undertaking both substantial renovations and cosmetic renovations. Often the two will complement each other and add to the overall improvement of your property. Knowing what you can claim will ensure that you obtain the maximum depreciation deductions from your investment property. BMT staff can assist you in reviewing your current circumstances and provide a tax depreciation schedule that includes a forecast of eligible depreciation claims. For a free assessment of your property, speak with one of our expert team on 1300 728 726 or Request a Quote online. To learn more, read Are home renovations tax deductible?

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Are home renovations tax deductible?

BMT team — Fri, 11 Oct 2019 03:07:49 +0000

More and more property investors are seeking to improve capital values and increase rental income by renovating their properties, rather than purchasing anew. While most investors are aware renovations can increase rental income and boost cash flow, many renovators are missing out on thousands of dollars by failing to claim depreciation deductions. In this article we will explore: Are home renovations tax deductible? What is scrapping? Important legislation for property investors Home renovation case study Are home renovations tax deductible? Most residential properties have significant depreciable value, which can be claimed prior to and after home renovations are completed. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. Depreciation can be claimed for a building’s structure via capital works deductions and for the plant and equipment assets contained within the property. While capital works can be claimed in both new and old residential property, plant and equipment deductions are limited to new property. This can affect what can and can’t be claimed when renovating. Regardless of the age of the property, it’s important to speak with a specialist Quantity Surveyor before completing any work. There may be substantial depreciation deductions available for any structural elements being removed during the renovation process. This is known as scrapping. What is scrapping? Scrapping allows you to claim depreciation deductions for the residual value of removed assets in the year the items are removed. To take advantage of deductions for scrapped assets, a depreciation schedule must be arranged both before and after the renovation takes place. The pre-renovation depreciation schedule will detail asset values and can act as evidence in the event of an Australian Taxation Office audit. Once the renovation has been undertaken, a Quantity Surveyor will compile an itemised schedule detailing the depreciation deductions available for the brand-new plant and equipment assets and capital improvements. The depreciation schedule will also show the undeducted value of the removed structural assets. Important legislation for property investors Investors who purchase second-hand residential property after 7:30pm on the 9th of May 2017 are not able to claim scrapping deductions for existing plant and equipment assets. If you exchanged contracts prior to this date, you should discuss your eligibility with a Quantity Surveyor for any residual depreciation that may apply. If you live in your rental property while renovating, any newly installed assets will also be classed as previously used. As a result, you’ll be at risk of losing your tax benefits. Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions once the property has been listed for rent. This will ensure you are eligible to claim the maximum depreciation deductions available. Home renovation case study Jonathan purchased a ten year old two-bedroom house after 7:30pm on the 9th of May 2017. After renting his property out for a year, he decides to renovate the bathroom. According to current legislation passed in November 2017, he is ineligible to claim scrapping deductions for existing plant and equipment assets. Capital works deductions for structural assets such as tiles, bathtubs, toilets, sinks and basins are unaffected by the legislation changes and can still be claimed. These deductions typically make up 85-90 per cent of a total depreciation claim. Jonathan arranged a property depreciation schedule when he originally purchased the property. After hearing about the additional deductions available when renovating from his accountant, Jonathan contacted a Quantity Surveyor before starting work to find out more. Jonathan found he was able to use his existing depreciation schedule to work out the un-deducted value of structural assets to be removed during the renovation. The table below outlines the deductions Jonathan could claim for the removed structural assets as well as any capital improvements made during the renovation. After renovations, Jonathan was able to claim $7,830 in scrapping deductions and $333 in capital improvement deductions. Combined, this totals more than $8,000 in depreciation deductions in the first full financial year. He was able to maximise the depreciation deductions on his investment property both before and after the renovation. To maximise depreciation deductions during home renovations, consult with a specialist Quantity Surveyor before getting started.

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Lucrative assets to install when renovating

BMT team — Thu, 29 Aug 2019 01:55:17 +0000

A growing number of investors are choosing to renovate their investment properties each year. Master Builders Australia has forecast homeowners and investors will spend $8.8 billion annually on renovations over the next five years. Renovations can increase rental yields and improve cash flow however there are many important factors to consider before getting started. One of the most crucial aspects to consider is the effective life of depreciating assets. In this article we will look at: The effective life of depreciating assets Effective life of depreciating assets for flooring Effective life of depreciating assets for window covers Important depreciation legislation The effective life of depreciating assets Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. The effective life is used to work out the asset’s decline in value for which a depreciation deduction can be claimed. Each asset also has a rate of depreciation which helps to determine the deductions an investor can claim over the asset’s effective life. Investors can claim depreciation deductions for more than 6,000 different assets recognised by the Australian Taxation Office. With so many assets to choose from, it’s important to understand how variations in effective life can alter the depreciation deductions available. We look at flooring, window covers and lighting to help you choose the most valuable assets when renovating your investment property. Effective life of depreciating assets for flooring Carpet has an effective life of eight years. Using the Diminishing Value (DV) method, a rate of 25 per cent is used. If a landlord installs carpet worth $4,000, they will be eligible to claim $1,000 in depreciation deductions in the first full financial year. However, if they install floating floorboards or tiles of the same value, the available deductions will be $533 and $100 respectively. In this scenario, an investor who installs carpet will be able to claim the highest depreciation deduction, while the investor who installs tiles will be eligible for the least. Effective life of depreciating assets for window covers Blinds have an effective life of ten years and a DV rate of 20 per cent. If a landlord purchases blinds worth $3,000, they will be eligible to claim $600 in depreciation deductions in the first full year. If they install curtains of the same value, the first-year claim would increase to almost $1,000. On the other hand, if the landlord decides to purchase plantation shutters, which have an effective life of forty years and a DV rate of 2.5 per cent, the first year deduction would be just $75. With this in mind, curtains are the most valuable asset from a tax perspective. It’s important to note that blinds and curtains may be eligible for low-value pooling. Low-value pooling is a method of depreciating plant and equipment assets which have a value of less than $1,000. Any plant and equipment assets with a value of less than $1,000 can be included in a low-value pool and written off at an accelerated rate to maximise deductions. Items can be depreciated at 18.75 per cent in the first year and 37.5 per cent each year thereafter. Important depreciation legislation It’s important to note that legislation passed in November 2017 brought about major changes to residential plant and equipment depreciation claims. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits. Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions after they move out of the property and it has been listed for rent. The 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective. Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. When removing structural assets there may be remaining depreciation deductions available. A process known as scrapping can often be applied, allowing investors to claim these deductions in the year the items are removed. To find out more, contact a specialist quantity surveyor to organise a tax depreciation schedule before starting renovations.

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Kerb appeal – find tenants for your rental property with a tidy home exterior

BMT team — Fri, 15 Feb 2019 05:20:52 +0000

Prospective tenants are no different to prospective buyers – they’re all attracted to a well-presented property. You want prospective tenants to want your home and getting them through the front door is the first step. Before commencing the advertising and marketing campaign, ensure your investment property’s presentation has exceptional kerb appeal to attract quality tenants. You’re more likely to find a tenant quickly, keep them long-term and obtain the premium rent if the property is well kept. Tips to increase kerb appeal and find tenants for your rental property Complete pre-rental maintenance Keep the lawns mowed, edged and free from green waste Weed all gardens and mulch to create a fresh, easy-maintenance appeal Ensure the driveway is free of dirt and grease Knock down any cobwebs and clean the windows Prune and shape any trees or shrubs around the home and make sure gutters are clean and rust-free Ensure fences and gates are secure, safe and sturdy to appeal to tenants with children or pets and eliminate safety issues Make sure there is a number present on the house or letter box, as prospective tenants need to be able to find your home quickly and easily Check outdoor lighting is adequate and in working order If your investment is an apartment/unit If your rental property is in an apartment block or a building managed by a body corporate, these things may be beyond your control. In this case you can speak to the strata about the state of the building’s exterior. However, you can ensure your front door and entry way is tidy, clean and free from debris. A welcome mat and a freshly painted apartment front door can do wonders. Simple renovations to maximise your rental return You may be required to perform some small external renovations to your investment property. The trick is knowing which renovations will increase the value of your property, improve rents and impact on the depreciation deductions you can claim. It is also important not to overcapitalise when renovating your property. Don’t underestimate the value of a lick of paint. Taxing issues The big question when renovating rental properties is whether the expenses are capital in nature or a deduction. If you renovate before you get any income from the property by renting it out, the expenses become part of the property’s cost base and may not be tax deductible, but if you have a property that you currently rent out and do repairs on, your costs become deductible. Keep in mind that renovations should increase your depreciation claim for eligible items, which in turn will reduce your tax bill. You may also be eligible to ‘scrap’ assets you’ve removed during renovations, which can hold a remaining depreciable value and could be worth thousands of dollars in deductions. For a free estimate of the likely depreciation deductions you could be claiming from your renovation contact our expert team at BMT Tax Depreciation today.

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How to work out your renovation budget

BMT team — Sun, 13 Jan 2019 22:14:33 +0000

How often do you hear of planned property renovations going over budget? Many renovators spend more than they originally planned. This could be due to unexpected problems arising, a change of mind mid-way through the project or as a result of poor planning and not having a proper renovation budget in place. If you don’t plan your renovation budget the process can become stressful. So, before you start envisioning your dream, estimate how much you can afford to spend and then break it down into individual sections so that you can figure out how much money needs to go into each part of the project. By doing this, you can then determine the quality of the finishes you can afford. Creating a realistic renovation budget rests on how accurately you estimate your costs. Follow our quick tips to help you work out your renovation budget, before you break out the tools. Decide of the size of your renovation The size of your renovation has a big impact on the final cost. Start with a list of absolute essentials and then the ‘nice-to-haves’ and prioritise your list. Be prepared to compromise at some stage if money becomes tight during the renovation process. Avoid over capitalising Begin with an understanding of values in your area. A good starting place is to establish the likely sale price or valuation price after the renovation has been completed. Look for similar properties in your suburb which have already been renovated using real estate portal like homesales.com.au. Use a budget calculator There are some helpful renovation and building calculators out there. They’ll give you a rough estimate of costs and help you plan. The handy BMT Construction Cost Estimator could be a useful guide before you start getting quotes. Get three quotes from tradespeople You should always get at least three quotes from builders or tradespeople. You’ll be surprised how much they can vary from tradesperson to tradesperson. To find quality tradespeople, look online and read individual reviews or ask friends or family for recommendations. Plan a contingency into your budget Add 10-20 per cent to your final budget. Overspending is very common during building projects. Unknowns equal risks. Part of determining contingency is planning for the worst. By identifying risks such as poor weather and scheduling issues, you will get a better idea where the contingency budget might go, which will give you an idea of how much you might need. You can never do too much research The internet has a surplus of helpful information and instruction on renovating/home improvement, budgeting and investment property renovation tips. It will become your most use and valuable resource. To discover whether there are any depreciation-related implications to renovating an investment property, read our recent blog ‘Can you claim tax deductions when renovating an investment property.’

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Three big benefits of renovating your investment property

BMT team — Wed, 14 Mar 2018 03:32:50 +0000

Renovating your investment property may seem like a daunting task, but making adjustments and improvements to your investment can reap rewards. Here we’ve covered three of the biggest benefits of renovating. Attract and retain quality tenants Increase sale price and capital gains Improve energy efficiency and reduce environmental impact Depreciation considerations 1. Attract and retain quality tenants Every renter has an anecdote about a landlord who would not make even the most practical or minor upgrades to the property. If you are an investment property owner and your renting days are a distant memory, it might be difficult to think from the perspective of the tenant, but it’s important not be dismissive of their ideas or concerns. Obviously the best time for renovations such as painting and recarpeting are best done when you first buy the property or between leases, but there are many minor works that renters won’t mind happening while they are there. Upgrades to ovens, air conditioning and washing machines are always welcomed by tenants. Or you could add features that will make the property more liveable such as a clothes dryer, dishwasher, or quality blinds and curtains. The flow-on effect of renovating and upgrading is that existing tenants will be happier and more comfortable, and if you are looking for tenants, you will have a wider selection of prospective tenants to choose from. By showing that you are prepared to improve a property and not just let it fall apart shows respect for your tenants and can result in positive morale which will show through in your tenant’s loyalty and desire to keep your investment in good shape. 2. Increase sale price and capital gains Renovating your property every few years will most likely improve the price when you sell. Even if you have no plans to sell, it is worthwhile consistently keeping the property up-to-date and in good condition in the event that your circumstances change and you need to sell quickly. The best way to keep your investment looking fresh is to paint the walls at least every ten years. Stained carpet and damaged floorboards makes the property less appealing, so invest in a professional clean or polishing. If the apartment is vacant, consider replacing carpet and floorboards. If you have the means, renovating the kitchen and bathroom will add significant value. It is also important to maintain the front and back yards if your tenant is not currently doing so. It is essential that you choose colours, fixtures and furnishings that won’t go out of fashion. The safest bet is to stick to neutral colours or use a consultant to guide you. By using classic colours and styles, your property will appeal to a larger range of buyers, thus increasing the selling price. 3. Improve energy efficiency and reduce environmental impact Installing solar panels might seem like a drastic and expensive outlay, but quite rapidly your current and future tenants can reap the rewards. This will make the property more appealing to tenants because the rapid rise in electricity prices is causing real financial stress for renters. In areas with consistent bright sunlight, installing solar is a great option to consider as this can add value to your investment property. Many people, in particular millennials, are becoming increasingly environmentally conscious and are renting for longer. Your tenants can also use an app to see how much power is being produced, and how much they are using, which helps them use power efficiently to reduce costs and environmental impact. If installing solar panels is not an option, there are other renovations that can reduce environmental impact. This can be as simple as double-glazing windows and providing quality blinds and curtains to retain warmth in winter and keep the home cooler in summer. If you have reverse cycle air conditioning, upgrading these units every seven years will improve energy efficiency. Depreciation considerations Keep in mind that any renovations which are completed should increase your depreciation claim for eligible items, which in turn will reduce your tax bill. You may also be eligible to ‘scrap’ any assets you’ve removed during renovations. For a free estimate of the likely depreciation deductions you could be claiming from your renovation contact our expert team today.

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Three lessons from The Block

BMT team — Tue, 30 Aug 2016 01:50:32 +0000

It’s that time of year when television junkies and property enthusiasts sit on the edge of their couches to watch a new group of contestants take on the most epic of renovations in the latest season of The Block. This year we’ll be watching closely as Blockheads Julie and Sasha, Andy and Ben, Kim and Chris, Dan and Carleen and Will and Karlie pick up their hammers, tools and paint brushes to construct, create and style five apartments in the sunny bayside suburb of Port Melbourne. As the contestants work on sprucing up the former 1920s factory building, we took a look at some of the lessons the contestants could learn from previous seasons to improve their chances of creating winning rooms and apartments. These lessons will also help investors who plan to complete a renovation to their own investment properties. Set a budget and carefully plan where the money will be spent If there’s one lesson both this season’s Blockheads and property investors can learn about renovating from previous seasons, it’s that they should set a budget. Dean and Shay spent a third of their renovation budget ($40,000) on their penthouse bathroom during The Block: Blocktagon season and Tim and Anastasia walked out during The Block Triple Threat when they discovered they only had $1,500 left in their Block account. Already this season we’ve seen Julie and Sasha, Dan and Carleen and Will and Karlie struggle with budget issues during the 48 hour pod challenge and one pair has spent a whopping $65,000 on their very first room reveal, the master bathroom. Renovations involve careful planning, so it’s important to set a spending limit and to ask tradespeople to provide a quote before they start work. The costs of a renovation can blow out easily, particularly if plumbing and drainage issues are revealed when replacing old baths, vanities, showers and tiles in a bathroom or when removing and relaying pavers outside in the yard. In older properties you could also discover asbestos which requires careful removal which can be costly. It’s a good idea to set aside additional money just in case hiccups like these occur. While the Blockheads are required to keep a track of their budget and have the added advantage of winning additional money from challenges, there are no such extra windfalls for those taking on a renovation at home, so without careful planning it’s easy to end up with additional debt. Set a time frame for renovation completion During The Block Triple Threat, Tim and Anastasia received the lowest score ever revealed by the judges because they handed over an unfinished study. While property investor’s don’t have the same time constraints to reveal their renovations to a set of judges like The Block contestants do, this doesn’t mean they shouldn’t set a deadline for each section of work planned and due date for the project’s final completion. Often renovating an investment property will mean working quickly so not to disrupt an existing tenant. If it’s a major renovation requiring the tenants to vacate, owners won’t want the work to go on for a prolonged period that will result in any further loss of rent. As we’ve seen on The Block time and time again, things must be completed in order to allow a project to run smoothly. In the 2013 season of The Block Sky High, Alyssa and Lysandra showed the other contestants how careful planning earns winning results. In their two ensuite bathrooms, the pair carefully planned to place polished concrete over electric floor heating. Timing of completing such a task is important because it requires multiple steps to plan and install drainage, build screed placed over the electric heating elements, lay concrete and polish it for perfection. For this year’s contestants, as in previous seasons, if they don’t set time frames they will no doubt end up in hot water. However if all works according to their plan this will no doubt give them an advantage that could result in a win. Don’t just style, select assets which will increase your income There is more to be learned from The Block than what colour cushion works best on a particular duvet cover, what colour tile to place on the walls or which vase looks best on top of a mahogany bedroom dresser. While the new contestants should do their research to be aware of current styling trends, they should also think carefully about what they are installing in the property. As past contestants have learned, their decisions when choosing from the options available and the value of the assets they choose do have an impact on buyers. Many of the structures and assets installed will have additional value for investor buyers who can claim depreciation deductions over time for the wear and tear that occurs to the building and plant and equipment contained in the property. Two teams who successfully sold to investor buyers in the past include 2011’s Polly and Waz and 2014’s Simon and Shannon and a number of The Block properties have been rented after initially selling to owner-occupiers. For those planning a renovation to an investment property, while you might not be trying to tempt a new buyer, you may want to improve the rental return by luring a better tenant. You may also want to select items which will increase the depreciation benefits, so don’t forget to contact an expert and speak to a Quantity Surveyor before you start work.

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