Renovating without Depreciating – is it costing you?
You’ve just bought your first investment and you’re excited to get renovating. Michael has some great tips from ‘The Successful Investor’.
- Have a depreciation schedule sorted before you start anything.
- Once you have a depreciation schedule make sure you let your accountant know and particularly if you throw anything away.
- Get another depreciation schedule done once post-renovation occurs so you can claim on the new items.
A typical list of discarded items during a renovation might include:
When a renovation may not ADD value.
While it is easy to get carried away with a renovation, it also can be a mistake – why? Because a depreciation schedule for an older property places a value on each taxable item. Let’s say the values look like this:
For a taxpayer on a 33% tax rate, their tax refund on these items is $1,287.00. Throwing these items away is the same as throwing away money.
Normally these items are depreciated over a number of years, but because they’re being scrapped the full tax deduction is available in year one.
How to make sure you don’t MISS these tax allowances
First, have a depreciation schedule done before you throw anything away. Track all the items you dispose of and tell your accountant. They will then claim these tax deductions for you in the first year of ownership.
Secondly, get a second depreciation schedule done once the renovation is complete and claim depreciation on all the new items.
I was recently talking to a client of mine who bought an investment property intending to knock it down, and build another. I advised them to get a depreciation schedule done on the old place which identified $7000 in tax deductions or a $2,310 tax deduction in year one. If hey demolished the property as planned and sent everything to the tip, they might as well have thrown away that $2,3010.
ONE MORE TIP ABOUT TAX
Don’t claim new items in full if they should be depreciated, as that’s a sure easy way of getting into strife with the tax office. Only some parts of a renovation can be claimed as a depreciation. If you repair an item or paint the walls you can generally claim that at the tax deduction in year one.
But if you replace an item, you must depreciate it over 40 years – or its effective life. For example, new built in cupboards or a skylight are considered part of the building and are building costs which are depreciated over 40 years. But replacing carpet because it had a hole is not considered a repair, it’s depreciated over 10 years.
Further information can be found by Mr Michael Sloan from the “Successful Investor”. Mr Sloan’s reviews are his own. Seek independent financial advice before making any investment decisions.