Renovations and repairs can boost the capital value and rental yield of an investment property, but they can also have tax implications.
Stephen Jones of ATM Consultants warns that “property investors need to know the tax implications of renovating because there can be both income tax and capital gains tax implications, and there might even be GST implications.”
Here are five tax considerations for investors planning to renovate:
Know the difference - repairs vs. renovations
Repairs are generally a deductible expense, so can be deducted from the investor’s present year’s income. Renovations are usually a capital expense and may be able to be depreciated over time. You can read more here.
If they are plant and equipment, then they can be depreciated over the useful life of that item. The actual construction, however, is treated under a separate division of the tax act and has to be written off over 40 years at 2.5 per cent a year, says Jones.
If the property is sold sooner, then the remaining capital costs are used to calculate the cost base of the investment, reducing the amount of capital gains tax payable.
The key difference is that repairs are maintaining what is there already.
Get the timing right
One trap investors fall into is buying a property and making repairs straight away, before they have a tenant.
Repairs are deductible because they are fixing wear and tear caused by the tenants. It may make sense to upgrade a rundown house to attract a good tenant.
Keep detailed records
What might seem on face value like a renovation only – and so not deductible – might have components of repairs. For instance, repainting an existing room would count as a repair.
Property investment advice: know the A$300 deduction rule
Items which investors would normally have to be depreciated over a number of years, for example fixtures such as light fittings, can be immediately written off if they cost less than A$300, says Jones. It can be worth trying to stay under that cap for certain items or buying smaller items individually.
Consider the GST implications
Newly-built homes are subject to GST when they are sold and significant renovations could make the property subject to GST as well.
What significant renovations means exactly can be a bit of a grey area. Speaking with an experienced professional can help make the distinction clear.
Renovators can make some costly miscalculations when it comes to tax treatments. Book a consultation and keep in the know when considering your next renovation.