WAIT BEFORE YOU RENOVATE
Rushing into renovating a newly purchased property may not necessarily be the best idea.. “revamping the kitchen”, “doing up the bathroom” etc.
Investors First consider the financial ramifications of such a strategy- that of which the capital outlay of the reno’s are usually secondary to the tax benefits that could be achieved if the renovations were left until after “a reasonable amount of time”.
Put simply, if the renovation s were to commence immediately after the purchase, the taxman would consider those items replaced as to have no value in the purchase and therefore not depreciable.
If however renovations were left until a reasonable amount of time, those items would not only have a value in the purchase and be considered depreciable but also more importantly have a ‘written down’ value when replaced which can be claimed in full when demolished.
An example found
A multistorey office building in the Brisbane CBD was purchased by a national organisation as part of their portfolio to accumulate, over a period of time, and to demolish for future redevelopment.
The property was vacated by public servants after purchase leaving $300, 000 of demountable partitions and $200 000 of workstations – becoming reversionary plant ( ownership reverting back to the owner of the building)
Instead of salcvaging and reselling what they could then demolishing the building, the owner was advised that as long as the property was made available for rent they could continue to depreciate not only the $500 000 of demounts and workstations but an additional $700 000 of depreciable plant contained within the building.
The true windfall came when by depreciating the items over a period of time ( 2-3 years in this case) when the building was demolished the residual could be claimed at 100% in the year of demolition.
Therefore by keeping it for 3 years instead of demolishing immediately the owner was able to claim a total of $1.2 million in depreciation over that time.
The ‘same’ principles apply to all investment properties..
Building may be depreciated at 2.5% or 4% depending on age..
If you’re not doing it yet I suggest you look into it ! I actually chased it up through http://www.deppro.com after reading a local story about a young girl (23) who was purchasing her 4th or 5th property, her strategy being purchase, get tenants in, pay off loans as quick as possible, get deppro to do depreciation schedule, with tax return go searching again.
REDWING“The man that thinks at 5o as he did when he was 20 has wasted 30 years of his life”
Hi Redwing,
Great info. The local girl story you talked of- when did she renovate?
Is this how it goes:
Settle property, get dep. schedule, rent for a year or so, renovate, get another dep.schedule
Or
Just a dep. schedule after the renovating?
Hope that makes sense [
]
Sue []“Be careful not to step on the flowers when you’re reaching for the stars”
that’s all very well, but sometimes when you buy is the time to renovate – i.e., the place is empty. After that you want a good tenant who’s going to live there for the rest of their lives giving you zero grief, and who you attracted by your brand newly renovated place.
“the owner was able to claim a total of $1.2 million in depreciation over that time.”
That’s a lovely story, but I doubt I would get the same benefits from my 10K reno on a 19K house…
*grin*
besides, who has 1.2 million worth of income that they need to offset with a few on=paper losses?
it’s all relative, innit!?????Have to agree with mini on the “renovate as soon as you buy” option. Especially in the present climate, where vacancies are high. Many people are still trying to rent out houses that haven’t been touched since being built in the 50’s.
Worked a couple of years ago, but not now.
Sue []
P.S. I’d still like to know how it works though, redwing []“Be careful not to step on the flowers when you’re reaching for the stars”
As soon as your settle, get depreciation schedule done. Then renovate (whenever, immediately if you like), and get another schedule done.
You can then ‘write off’ what was there before, and start depreciating what is there now. As far as I’m aware, you do not have to wait – it’s not like the ‘is it a repair or improvement’ scenario.
Cheers
MelMel’s correct.
If you just renovate straight away anything which you discard has no “claimable” value. If you have had a depreciation schedule done then you can “write off” the value of the item which you are replacing.
Rod.
There is another way to renovate “now” and claim…later…..Case in point: I had purchased a property that had tenants from hell installed, subject to vacant possession…..I almost cried at the clean up…. so I just thought quick paint job, second hand carpet , lots of elbow grease, but… when trying to lift tiles in bathroom the floor fell out…long story….so had no option but to do 80% reno. My tradesperson, works for himself……. so he did all the work , I paid him cash at complettion but he gave me an invoice dated 11 months later.At time of puchase it rented for $150pw after rents at $240.00 reno budget $10,000.00
Thanks melbear & Rod,
Great, precise info, as usual []
Merry Christmas,
Sue[]“Be careful not to step on the flowers when you’re reaching for the stars”
Hello Redwing,
If after you buy a property you intend to renovate then sell, would it be worth doing a dep. schedule before renovations, and one after? Or would it not be worth doing one at all?
Bassla.Diclem
Great info. The local girl story you talked of- when did she renovate?
Is this how it goes:
Settle property, get dep. schedule, rent for a year or so, renovate, get another dep.scheduleThe local girl ( believe she was featured on Today Tonight as well as in The West Australian Newspaper) wasn’t renovating, my main point of the story was the value of using a proffesional depreciator, her story and the fact she used and recommended DEPPRO put me onto them.
She worked in a real estate Office and the principal of the company was her mentor ( we should all be so lucky ) The fact that at her age she was looking at her 4-5th property interested and motivated me.
As soon as your settle, get depreciation schedule done. Then renovate (whenever, immediately if you like), and get another schedule done.
You can then ‘write off’ what was there before, and start depreciating what is there now. As far as I’m aware, you do not have to wait – it’s not like the ‘is it a repair or improvement’ scenario.
As Melbear ( the wise) pointed out if you have to renovate, get the deppreciation schedule done ‘first’ and write off what was previously there, my accountant prefers to play it safe and i’d probally wait before i renovated, but, it’s all up to the condition of the property and it’s rental ability..
i was always told that ( for example) you shouldn’t paint a property immediately after purchase as the ATO considered that you were ‘improving’ the property not just keeping it in the condition in which you purchased it, and to ‘wait a reasonable amount of time’ before you painted..
however as minimogulsaid if the property was vacant and in need of repair, or renovation, to make it an attractive rental property, then i’d get the depreciation schedule done first.. THE WAITING PART is to play it safe with the ATO i believe, another consideration is no-one wants to do major renovations when your tenants are already in.. yes mini.. it’s all relative [
]Don’t forget.. with units you can also depreciate a portion of the common areas [
]My accountant told me they can’t just claim the depreciation on your building as they previously used to, just in case you get audited, you now need to get a Professional company in to do the depreciation schedule..and it’s a one off cost for the life of the property as your IP
REDWING
Thanks Redwing[8D], you made it all just that little bit clearer,
Merry Christmas,
Sue []“Be careful not to step on the flowers when you’re reaching for the stars”
can anyone recommend a REALLY GOOD QS in Melbourne? thanks
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