Maximising the Benefits of Depreciation Allowances for Renovated Properties
When you buy second hand or older residential investment properties, especially those needing major capital works or replacement of assets, you can benefit from thousands of dollars in savings through depreciation allowances.
Remember on older or second-hand properties purchased after the 9th May, 2017, you can only claim depreciation allowances for the Building (Division 43) and any new items purchased as part of (Division 40) allowances.
Capital Works
Major capital works include the addition of extensions or new structures such as shed, pool or tennis court, or replacement of rooms such as kitchen, bathroom and laundry. These qualify for depreciation as part of the Building depreciation allowance. Investors can depreciate the cost of capital works over 40 years.
Plant & Equipment Assets
Replacement of white goods or appliances such as a kitchen stove, cooktop, oven, or range hood are considered Plant & Equipment assets and will depreciate over the term of their effective life. Other items include hot water systems, air conditioners, dryer, refrigerators, furniture, even blinds and new carpets etc. These items must be listed in your depreciation schedule and NOT claimed as a direct deduction.
Repairs
Sometimes investors confuse claiming repairs for depreciation allowances. For instance, if you have repairs carried on air conditioner, or stove, you can claim these in full as a rental expense during the year they occur. Same as plumbing and electrical repairs, or any painting or carpentry work.
Depreciation Schedule
Your depreciation schedule will itemise the value of the renovations for the Building and the Plant & Equipment Items. Each year you can claim the value of these assets to offset your rental income and manage cash flow.
Write Off Reports
In some cases, where you have completed renovations that required the destruction of assets with a reasonable effective life remaining, it may be worth considering requesting a “Write Off’ report. This report will itemise the value of the items, and allow you to “write off” these disregarded items for taxation purposes, providing another added tax benefit.
Adding value to your residential investment properties through renovations will provide additional benefits to the overall value of your property. Whether you retain your property for several years or several decades, depreciation allowances will provide a benefit to you and any potential buyer in the future. To find out more contact our highly experienced and professional Property Tax Analysts for help.