Home renovation\’s overlooked tax deductions for investors
Many investment property owners may be missing out on valuable property depreciation entitlements, simply by not being up-to-speed on what is and is not depreciable. Experts say that the examples of assets that could qualify for tax deductions may surprise many taxpayers, and even nominate items such as kids’ cubby houses or garden gnomes which form part of the investment property for example.
But before you go out and splash cash on an upmarket Dopey or Sneezy, remember that conditions usually apply. The ability to access the depreciation is limited to investors, and certain conditions and limitations may also have to be considered. Still, according to depreciation specialists, rental property investors can depreciate hundreds of household items for tax purposes, including dishwashers, dryers and even built-in coffee machines. Where the investment property is an apartment, common areas such as new hydraulic car parking and fixtures and other assets contained in the recreational facilities may also be eligible.
Other eligible but often overlooked items include:
- pumps attached to spa baths
- free-standing spas, and
- water tanks.
Depreciation and amortisation allow investors to deduct a portion of the original cost of equipment and capital works on an investment property every financial year over the item’s “effective life” — which is the time over which the ATO or the legislation deems the depreciable asset will lose its value. Basically, the building and its assets are getting older and wearing out, so the ATO allows investors to claim part of their cost each year as a deduction. Ask this office for guidance or advice on effective life tables.
Other tax depreciation tips include:
- on new purchases of investment properties look at your renovations to determine if they would be an initial repair to improve the property (and therefore depreciable) or simply repairs and maintenance (and thus deductible all in the current period). Ask this office for further advice on how to tell the difference
- look at spending on assets, and compare similar asset rates of depreciation, such as white goods, carpets and window coverings
- keep all invoices and do not claim personal labour costs
- ensure the full effective life span of all depreciable items is claimed
- some investment buildings are eligible for a 40 year depreciation based on actual or historical construction cost. This applies to buildings built after 1985, however extensions and alterations to older buildings may also be eligible to be claimed over 40 years
- new kitchens, bathrooms, carports, garages, patios and barbecue areas built after September 1985 in older properties may be eligible for a capital works deduction
- swimming pools built after February 1992 may be eligible for depreciation as structural improvements
- provided no changes occur to the assets of an investor on an investment property, a tax depreciation schedule is only required once during the life of an investor’s ownership of the investment property — a qualified quantity surveyor can provide this schedule. Speak to this office for more details.
There is also the option to use the “residual value” of depreciable assets that are scrapped and replaced. A 20-year-old kitchen for example, with therefore 20 years still left on its effective life, can provide a deduction of 100% of its leftover value in the financial year in which it is scrapped. However identifying such a value may be an issue, so it is best to consult a tax professional and possibly use the services of a quantity surveyor before acting.