Investment property renovations and depreciation

Renovations can be a great way to improve investment property appeal and rental yield. Improvements and additions made to your investment property are also tax deductible, either as immediate tax deductions or incrementally as they depreciate over time. Read a more detailed explanation of the difference between repairs and maintenance and capital improvements in our blog here.

Calculating the depreciation claimable on improvements and additions to your investment property is best done by a quantity surveyor who can provide you with an ATO compliant tax depreciation schedule.

In this article we have specifically differentiated between a cosmetic and substantial renovation as the ATO has a specific definition for substantial renovations and they are treated differently in relation to the 2017 legislation changes regarding asset depreciation, as you will see below.

Capital allowance and depreciation for substantial renovations

The Australian Taxation Office defines substantial renovation of a building as: “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”.

Substantial renovations are a large scale upgrade of a property and will involve both capital works (construction) and the installation of replacement assets. From a tax depreciation perspective, and taking into account the legislation changes that came into effect in 2017, substantially renovated properties are treated in the same way as new properties that have not been lived in. The key message being that buying a substantially renovated property with new assets that have not been used, means that both the capital works and new assets qualify for tax depreciation purposes.

Important points regarding substantially renovated properties and claiming depreciation:

• Investors can claim on capital works they completed themselves (provided they did not live in the property during the renovation period);
• Investors can claim on all capital works from when the property becomes income-producing;
• Investors purchasing a substantially renovated property can claim on the capital works and new assets installed by the previous owner (so long as the property has not been lived in since completion);
• Renovator investors may be able to claim tax deductions for any residual value left in the construction that was demolished or disposed of.

Claiming depreciation for cosmetic renovations

Cosmetic renovations are improvements more superficial in nature and include upgrades like:

• Re-painting a property;
• Upgrading a kitchen or bathroom;
• Adding built-in robes.

Important notes about the claimable depreciation of cosmetically renovated properties:

• Depreciation is claimable for brand-new plant and equipment assets installed ie rangehood, stove (provided you are not living in the property whilst you are installing);
• Investors can claim on capital works they completed themselves (provided they did not live in the property during the renovation period);
• Investors can claim on all capital works completed whilst the property is income-producing, or from when the property becomes income-producing;

• Renovator investors may be able to claim tax deductions for any residual value left in the construction that was demolished or disposed of.

Do I need the renovation costs to claim for renovations on my investment property?

As per the Australian Tax Office qualified quantity surveyors are qualified to estimate construction costs. When a property investor is unable to provide a receipt for either works that they have completed or for a plant and equipment asset, a quantity surveyor is qualified to estimate the cost of the capital works or asset value.

Not all quantity surveyors specialise in costing for depreciation purposes. Depreciation specialists need to be able to professionally estimate construction costs, and must also be thoroughly knowledgeable in legislation relating to the tax deductibility of those works (effective lives, depreciation rates, pooling of assets etc). For this reason, depreciation specialists must also be registered with the Tax Practitioners Board as registered tax agents. Capital Claims Tax Depreciation are both professional quantity surveyors and registered tax agents.

Case studies featuring cosmetic renovations by property investors

Below we take a look at two different cosmetic renovations. The first being for an apartment and the second for a house. Both of our clients already had existing Capital Claims Tax Depreciation Schedules in place.

Case Study – Apartment Renovation

Our clients Rachel and Dominic completed a cosmetic refurbishment at their 2-bedroom apartment.  They hired a painter to paint the interior of the apartment, installed new flooring, and replaced the entire kitchen with new cupboards and appliances.

Rachel and Dominic were already claiming $6,150 in depreciation for this financial year (using their existing depreciation schedule), and that amount has now increased by a further $4,280 to $10,430. This refurbishment has added an extra $38,640 in deductions over the next 5 years.

Case Study – House Renovation

Our client Chiara gutted her entire 4-bedroom house and completed a full renovation. She hired a builder to manage the project. Additionally, she installed brand new carpet, lighting throughout, new blinds, and fully upgraded the kitchen and bathrooms.

Chiara was already claiming $1,867 in depreciation for this financial year (using her existing depreciation schedule), and that has now increased by a further $12,625 to $14,492. This renovation has added an extra $49,925 in deductions over the next 5 years.

Whether you have completed a cosmetic renovation or a substantial renovation at your investment property, it’s important to capture all of your available tax depreciation deductions. This can help you with your cash flow.

To find out what you can claim, call one of our friendly experts on 1300 922 220. We would be more than happy to give you a free estimate of what is available to you in tax depreciation deductions. If you would prefer to liaise online, click here ‘Get a free estimate of deductions’, simply fill in the details and we will get back to you as soon as possible.