Can You Claim Renovations on Investment Property? A Guide to Tax Deductions

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Investing in property can be a smart way to build wealth and generate passive income. One popular strategy for boosting the value and appeal of an investment property is through renovations. Whether you’re updating a dated kitchen, adding a fresh coat of paint, or creating an outdoor living space, renovations can make your property more attractive to potential tenants and increase its overall value.

But did you know that you may be able to claim tax deductions for the renovations you make on your investment property? Understanding the tax implications and potential tax benefits of property renovations can help you maximise your returns and minimise your tax liability.

Claiming Tax Deductions for Property Renovations

When it comes to claiming tax deductions for renovations on an investment property, it’s important to note that you can’t claim deductions as an immediate deduction in the same financial year you incur the expenses. Unlike other rental property expenses, such as council rates or property management fees, renovations are treated differently for tax purposes.

However, there’s good news: you can still claim a portion of the renovation costs over several years through capital works deductions. This means you can spread the cost of the renovations over an extended period, potentially reducing your tax bill each year.

Understanding Capital Works Deductions

As an investment property owner, it’s essential to understand the concept of depreciation. Depreciation is the natural wear and tear that occurs to your property and its assets over time. The Australian Taxation Office (ATO) allows you to claim tax deductions for this depreciation, which can be divided into two categories: capital works deductions and plant and equipment depreciation. It is important to note that the ATO permits depreciation deductions for plant and equipment assets contained within the property, highlighting the need to distinguish between capital works deductions and plant and equipment depreciation.

Capital Works Deductions

Capital works deductions relate to the structural elements of your property, such as the walls, roof, and built-in fixtures. These deductions are generally claimed at a rate of 2.5% over 40 years, depending on the construction date of the property.

Plant and Equipment Depreciation

Oven and Microwave equipment assets

Plant and equipment depreciation, on the other hand, relates to the removable plant and equipment assets within your property, such as air conditioners, curtains, and appliances. Each asset has its own prescribed effective life, and you can claim depreciation deductions based on this schedule.

When you renovate your investment property, the costs associated with the structural improvements can be claimed as capital works deductions. For example, if you renovate a bathroom by retiling the walls and installing a new vanity, you can claim these costs at a rate of 2.5% over 40 years, provided the property remains income-producing.

The Difference Between Renovations, Repairs, and Maintenance

It’s crucial to understand the distinction between renovations, repairs, and maintenance when it comes to claiming tax deductions. While renovations are typically claimed as capital works deductions over time, repairs and maintenance can be claimed as an immediate tax deduction in the year they are incurred.

  • Maintenance expenses are the regular, ongoing costs of keeping your property in good condition. This includes tasks like cleaning gutters, pest control, and servicing air conditioners. These expenses can be claimed as immediate deductions.

  • Repairs are necessary when something in the property is damaged or broken and needs to be fixed. For example, if a storm damages the roof, the cost of repairing the damage can be claimed as an immediate deduction.

  • Renovations or improvements, on the other hand, involve upgrading or enhancing the property beyond its original state. This could include installing a new kitchen, adding a room, or modernising the bathroom. These costs are claimed as capital works deductions over time.

To illustrate the difference, let’s consider a leaky tap in your investment property. If you simply replace the washer to fix the leak, this would be considered a repair and can be claimed as an immediate deduction. However, if you decide to replace the entire kitchen, including the leaky tap, this would be considered a renovation and would need to be claimed as a capital works deduction over time.

How to Claim Capital Works Deductions

To claim capital works deductions for your investment property renovations, property investors must engage a qualified Quantity Surveyor to prepare a tax depreciation schedule. This schedule will outline all the depreciable items in your property and the deductions you can claim each year.

If you already have a depreciation schedule and have recently completed renovations, you can ask your Quantity Surveyor to update the report to include the new capital works deductions. They will assess the renovation costs and provide you with an updated schedule that reflects the additional deductions you can claim.

It’s important to keep detailed records of all your renovation expenses, including invoices, receipts, and contracts. These documents will support your depreciation claims and provide evidence if the ATO ever requires it.

If you completed renovations in the past but didn’t claim depreciation deductions at the time, don’t worry. A Quantity Surveyor can still help you backdate your claims. They will inspect your property, estimate the costs of the renovations, and provide you with a depreciation schedule that allows you to claim the missed deductions.

At Thrifty Tax, our team of experienced Quantity Surveyors can assist you with preparing a comprehensive tax depreciation schedule for your investment property. We’ll help you identify all the deductions you can claim, including those related to renovations, to maximise your tax savings.

The Impact of Renovations on Capital Gains Tax

In addition to claiming depreciation deductions and understanding the impact of tax deductions on capital gains tax (CGT), renovations can also affect the CGT you pay when you sell your investment property. CGT is a tax on the profit you make from the sale of an asset, such as a rental property.

The cost of renovations can be added to your property’s cost base, which is used to calculate your capital gain or loss when you sell. By including the renovation costs in your cost base, you effectively reduce your capital gain, which in turn reduces the amount of CGT you’ll need to pay.

For instance, let’s say you purchased an investment property for $500,000 and spent $50,000 on renovations over the years. When you sell the property for $800,000, your capital gain would be calculated as follows:

  • Sale price: $800,000

  • Cost base: $500,000 + $50,000 (renovation costs) = $550,000

  • Capital gain: $800,000 – $550,000 = $250,000

If you hadn’t included the renovation costs in your cost base, your capital gain would have been $300,000 ($800,000 – $500,000), resulting in a higher CGT liability.

If you’ve completed renovations on your investment property but haven’t kept detailed records of the costs, Thrifty Tax can assist you with a Capital Gains Report. This report helps identify the capital costs associated with your renovations, allowing you to add them to your cost base and potentially reduce your CGT.

Key Takeaways

  • Renovations on an investment property can increase its value and appeal to tenants.

  • Renovation costs cannot be claimed as immediate deductions but can be claimed as capital works deductions over time.

  • Capital works deductions are claimed at a rate of 2.5% over 40 years for structural improvements.

  • Repairs and maintenance can be claimed as immediate deductions in the year they are incurred.

  • A Quantity Surveyor can prepare a tax depreciation schedule to help you claim capital works deductions for renovations.

  • Renovation costs can be added to your property’s cost base, potentially reducing your capital gains tax when you sell.

  • Keeping detailed records of renovation expenses is crucial for supporting your tax deductions and cost base calculations.

  • Engaging a professional, such as Thrifty Tax, can help you maximise your tax savings and ensure compliance with ATO requirements.

By understanding the tax implications of renovations and working with a qualified Quantity Surveyor, you can make the most of your investment property and potentially save thousands of dollars in tax each year. If you’re considering renovating your rental property or have recently completed renovations, contact Thrifty Tax today to learn how we can help you claim all the deductions you’re entitled to.

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