Claiming Depreciation on Your Investment Property Renovations
Purchasing an extra property to rent out is a smart investment, and for many savvy investors who’ve bought older or neglected homes, the property might need a bit of tidying up. Renovating is a great way to make the property more appealing and more valuable to potential renters, but you might not know that you can save money by claiming depreciation on your investment home renovations.
Consider this: in a routine renovation of an older property to get it up to scratch for renting, you’re likely to update the kitchen, bathroom, flooring, décor and fittings. This means that in a typical investment home renovation you could throw away things like carpet, blinds, fittings, fixtures and even stoves, ovens and white goods that could have a combined value of thousands of dollars.
Well, as it happens, these items are categorised as “plant and equipment” items by the ATO, and you can claim depreciation on their lifespan. Along with renovation construction (capital works) costs, you can claim 40 years’ worth of deductions on these items at a rate of 2.5 percent. In the eyes of the ATO, plant and equipment items have “residual value”, meaning you can claim deductions for the balance of depreciation left on the items. The tax break applies to homes built after 1985 and house renovations undertaken after 1985.
If the items are already in the house and being thrown out, the full tax deduction for the items is available from the day you purchase the property. If you installed the items as part of a renovation 20 years ago and you are now removing them because they’re dated, they have used up half of their 40 year depreciation time (as judged by the ATO).
This means, for example, that if you might renovate a kitchen and bathroom in your new investment property and remove, say, $3000 worth of carpet, blinds, fittings, fixtures, a stove, fridge, washing machine, etc. If the items were worth a combined value of $10,000 twenty years ago, then their residual value is $5000, which you can claim in plant and equipment residual value deductions. If you’re a taxpayer on a 33% tax rate, that amounts to a tax refund of $1650 – money that easily could have been thrown out with the bathtub!
So, How Can You Make The Most Of These Tax Breaks?
Firstly, have a depreciation schedule done before you begin renovations or throw anything away. Keep note of all the items you throw away and how much they cost. Then pass this information on to your accountant to claim the deductions. When you’re done renovating, have another depreciation schedule done immediately after the investment home renovations are complete so you can claim depreciation on all the new items installed. And make the most of your savings!