The warmer months are upon us which has some of us thinking about giving our investment properties a facelift.
Whether it’s a fresh paint job, flooring or a new bathroom, renovating your investment property can result in higher returns for years to come. Not only does a freshly renovated property attract quality tenants, it also puts more back in your pocket with ample depreciation deductions at your disposal.
The essential step to any investment property renovation is taking a head over heart approach. Here are our top 6 investment property renovation tips to maximise your returns.
- Tip 1: Know your market and budget
- Tip 2: Be aware of 2017 legislation changes
- Tip 3: Understand the effective lives of assets
- Tip 4: Learn about depreciation incentives prior to renovating
- Tip 5: Take advantage of the longevity of capital works deductions
- Tip 6: Don’t forget about scrapping deductions
Tip 1: Know your market and budget
The golden rule to any investment property renovation is to know your market, know your budget. It’s important to remember here that you’re renovating the property directly for returns and tenant appeal, not your personal preference.
It goes without saying, but you don’t want to spend outside your budget as this can have detrimental impacts to your cash flow. At the same time, you want to ensure the property renovation is suited to your market.
For example, if your target market is professional singles or couples, you may not want to reduce the size of living areas for an extra bedroom. Meanwhile, removing a bath tub won’t be the right choice if your market is families with children.
Tip 2: Be aware of 2017 legislation changes
When it comes to claiming the most depreciation possible following an investment property renovation, 2017 legislation changes are important to be aware of.
Under the changes, ‘previously-used’ plant and equipment assets can’t be depreciated. Plant and equipment assets are mechanical or easily removable in nature. Some key examples include floor coverings, hot waters systems, air conditioning units and light fixtures and fittings.
The key factor to be aware of when it comes to linking the legislation changes with your renovation is the ‘previously-used’ provision. This means that any second-hand plant and equipment assets you install during the renovation can’t be depreciated.
It may seem easier to stay at the property while the renovation is taking place so you’re close to the action but doing so can have harmful impacts to your future depreciation deductions. The previously-used provisions also apply to brand-new assets you installed during the renovation if you lived in the property at the same time, even for a short period. For this reason, it’s always recommended to never stay at your investment property during a renovation.
Tip 3: Understand the effective lives of assets
Every type of plant and equipment asset has its own effective life. This determines how much in depreciation deductions you can claim in each year.
A key example of how important the effective lives of assets can be when renovating is in flooring. As one of the most renovated assets, depreciation deductions can vary greatly depending on flooring type.
Carpet has an effective life of eight years, while floating timber flooring has an effective life of fifteen years. This means you will be able to claim more from carpet in earlier years as it depreciates sooner, while floating timber would result in a steadier flow of deductions over the long-term. Meanwhile, tiles are considered to be part of the building and therefore claimed over forty years at a low rate of 2.5 per cent.
For example, $2,000 worth of carpet would be a first full year claim of $500. The same amount of floating timber would be a first full year claim of $266 and tiles would be $50.
Tip 4: Learn about depreciation incentives prior to renovating
There are several depreciation incentives available that can boost your cash further and sooner following a renovation. Being aware of these can help you choose assets that will compliment your returns.
The first is the immediate deduction. This incentive allows you to immediately deduct any new, eligible plant and equipment asset that costs $300 or less. There is no limit to the number of assets that can be deducted, as long as they meet the given eligibility requirements. We have seen this humble deduction boost cash flow by thousands in just one year.
The second incentive is the low-value pool. Plant and equipment assets that cost or are valued at $1,000 or less can be placed in the pool.
Once an eligible asset is placed in the low-value pool, depreciation deductions are fast-tracked. In the year of purchase, depreciation is calculated at an increased rate of 18.75 per cent. During following years, the rate is heightened further to 37.5 per cent.
Tip 5: Take advantage of the longevity of capital works deductions
We have provided several tips on making the most out of plant and equipment assets following a renovation, but it’s just as important to exploit capital works following a renovation.
Capital works is the structural component of the investment property. If you build a wall, tile the bathroom or install new kitchen benchtops you are doing a capital improvement. These can be deducted with capital works deductions for a forty-year period.
On average, we find capital works make up 85 to 90 per cent of total depreciation claims! So its important to ensure you factor in any capital improvement you may be weighing up during your renovation.
Tip 6: Don’t forget about scrapping deductions
The new assets aren’t the only ones you can benefit from following your investment property renovation. The qualifying assets you removed in the process can also boost your cash flow.
A process called scrapping allows you to claim the un-deducted depreciable amount from removed assets. ‘Scrapped’ deductions can be claimed on plant and equipment, in addition to structural assets .
While it seems straight forward, we have seen investors make the same mistake in the scrapping process countless times.
They do this by not having a tax depreciation schedule completed on the property before the renovation took place. At first glance this makes little sense, why would you get a schedule completed when you’re getting rid of the assets anyway? The reality is that the before-renovation schedule is essential to ensuring that they claim the maximum scrapped value. Without one, they cannot possibly accurately claim the scrapped deductions they could be entitled to.
BMT Tax Depreciation is here to ensure you make the most out of your investment property renovation. To learn more or to receive an obligation-free quote, contact BMT on 1300 728 762 or Request A Quote.