Do you know how to depreciate rental property improvements correctly?

BMT team — Thu, 18 Nov 2021 22:35:23 +0000

Making improvements is all part of owning a property, whether it be a home or an investment. The difference with making an improvement to an investment property is that it can result in higher rental returns and depreciation deductions. But do you know how to depreciate rental property improvements? And what is involved in doing so? Understanding difference between improvement and repair Before we get into the nitty-gritty of how to depreciate rental property improvements, it’s imperative to understand the difference between improvements and repairs as they are claimed differently. An improvement is improving beyond what was there to start with, while a repair is bringing back what was there. A repair can be claimed as an instant deduction while an improvement must be depreciated. Differentiating between the two is considered on a case-by-case basis and an accountant will look at a number of factors such as the asset installed, what was there before, the costs and the reasoning for the repair or improvement. For example, replacing linoleum flooring with brand-new carpet would be considered an improvement as you’re replacing the previous asset with a new, higher quality one. But if you instead just replaced part of the linoleum floor with similar flooring it could be classed as a repair. How to depreciate rental property improvements How this is done depends on the type of improvement and what category of depreciation the improvement, or parts of it, fall under. If the improvement is structural in nature or involves installing fixed assets like kitchen benchtops, tiles and doorknobs, then it needs to be depreciated using capital works deductions. Capital works depreciate at a rate of 2.5 per cent per year for residential properties. This means a capital works renovation can produce valuable depreciation deductions for forty years. But if the improvement includes easily removable or mechanical assets, then plant and equipment depreciation deductions must be used. These work differently as every plant and equipment asset has a designated effective life, so they depreciate at different rates based on the depreciable lifetime they are given. Before any renovation an investor must remember that there are 2017 legislation changes in place that impact depreciation available on plant and equipment assets. It means that any second-hand plant and equipment asset purchased and installed after 9 May 2017 are ineligible for depreciation. Therefore, those looking to take full advantage of depreciation should avoid installing a second-hand plant and equipment asset during a renovation. Some plant and equipment assets may also qualify for special incentives. One of these is the immediate write-off, where new assets that cost less than $300 can be claimed as an instant tax deduction rather than depreciated over time. The second incentive on offer is the low-value pool. This allows new assets that are installed during an improvement to be depreciated at an accelerated rate if they are valued at less than $1,000. It’s also important to remember that anything removed during a renovation can be ‘scrapped’. This means any undeducted depreciable value of a removed asset or structure can be claimed as an instant deduction in the same financial year. Now that we know how an improvement depreciates, how can it be claimed as a tax deduction? The key to claiming this depreciation on property improvements is to use a tax depreciation schedule. This essential report outlines every single depreciation deduction claimable from the rental property. An accountant uses this schedule at tax time each year to determine the depreciation deduction to reduce the financial year’s taxable income. What happens if an improvement is made after a tax depreciation schedule has already been prepared? Rental property improvements are made for a variety of reasons. One could be made due to damage or damage prevention, or simply a renovation to improve the rental return of the property. Whatever the case, the good news for investors that have an existing schedule with BMT is that it’s easy to make amendments to a current schedule to ensure the improvement and its assets are included. Now that you know how to depreciate rental property improvements and what’s needed to do so, contact BMT today on 1300 728 726 or Request a Quote.

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Repairs, maintenance and capital improvements for a rental property

BMT team — Sat, 17 Apr 2021 23:15:45 +0000

One of the most common mistakes made by property investors when completing their annual tax return is confusing repairs, maintenance and improvements. In this article, we will cover: What is a capital improvement Repairs vs maintenance Repairs, maintenance and improvement example It’s important to understand and distinguish each deduction in order to correctly lodge your claim and maximise your tax refund. Key points: Repairs are considered work completed to fix damage or deterioration of a property Maintenance is work completed to prevent damage or deterioration of an asset A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase A quantity surveyor can help you claim your depreciation deductions correctly What is a capital improvement? A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation. Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings. Repairs vs maintenance for rental property According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. Maintenance is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion. Any costs incurred to repair or maintain your investment property can typically be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out your capital gain or capital loss when you sell the property. Repairs, maintenance and capital improvement examples Let’s take a look at an example of when you might need to distinguish between repairs, maintenance and capital improvements. You might decide to renovate the bathroom in your investment property: Retiling the bathroom would be deemed as a capital improvement and can be claimed as a capital works deduction. Residential homes in which construction commenced after 15 September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over 40 years. If you decide to replace a light fitting in the bathroom, this will be claimed as a plant and equipment asset and can be deducted based on the asset’s effective life. If the purchase was less than $300 it will be 100 per cent tax deductible in the year the expense was incurred. If you fix a crack in the plaster, this will be considered a repair as you are restoring a damaged asset. You’re entitled to claim an immediate deduction for any expenses involved. Property investors completing renovations should also be aware of legislation introduced in 2017. The legislation stipulates that investors who purchased property after 7.30pm on 9 May 2017 are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. But these investors can still claim depreciation on new plant and equipment assets added to a property. However, if an investor lives in their rental property while renovating, any newly installed assets could be classed as previously used. Therefore, the investor is potentially risking their tax benefits so it’s important not to live in an investment property while renovating.. Claim your depreciation deductions correctly If you added anything to your property in the last 12 months, you can simply log into the MyBMT portal to add new assets to your schedule, or you can contact BMT’s team on 1300 728 726. The best way to ensure you claim property improvements correctly is to contact a specialist quantity surveyor to arrange a tax depreciation schedule update.

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Do you know how to depreciate rental property improvements correctly?

Repairs, maintenance and capital improvements for a rental property