Hi all,
Me and my partner are planning to buy our first home (existing property) and turn it into an investment property so we can save some money for our wedding.
Our plan was to live in it for six months and rent it out for maybe 2 to 3 years or so, once we get married we will do some renovation to the house and move back in as our primary residential property.
We haven't decided on which house to buy yet, but quite a few properties that we've looked at, we actually wanted to renovate the whole kitchen or bathroom, and maybe knock off a wall to make it a open plan living room/kitchen.
Now my question is, if I do these renovation while the tenants are still living in there, OR, if we renovate within the financial year when the property were rented out, can I claim the full cost, or most of cost for the renovation?
I live in NSW if that helps… Any help will be appreciated!
Cheers~
I am not an accountant but you need to fully understand the differences between what is considered a repair and what is considered a renovation.
Renovations (improvements) are not deductible but the work would most likely be depreciable. See this ATO fact sheet for definitions of an improvement.
Repairs, on the other hand, are deductible. The definition of a repair is very explicit and narrow. See this ATO fact sheet for definition of a repair
Suggest you spend some time on the ATOs website or speak with your accountant to determine the difference
Doing major renovations with a tenant in the house could be tricky and they might not like the constant interruptions.
You have to be very careful when renovating with tenants in the house. They can easily take you to court and claim compensation for the renovations. NSW tenancy rules have changed giving tenants a lot of power. Just be a bit cautious.
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if you intend on doing a whole kitchen or bathroom, it would suggest a capital improvement instead of a repair, which would mean it can't be claimed in the one hit but is depreciable and also would form part of the cost base for CGT purposes.
Your accountant can confirm this.
Cheers
Tom
Do the work between tenants ie have the first one on a 6 month lease only, then you may get away with some works being maintenance and the rest as improvements/capital expenditure which can then be depreciated. If you do the work before you have leased it out, then it is all capitalised as you have purchased in a condition requiring work.
Hi everyone,
Thank you so much for the info!! If renovations (or improvements) cannot be tax deductible but only depreciable and also form part of the cost base for CGT purposes, would it be better if me and my partner start the property off as investment property first, then after a few years claim it back as residential property? Do you think its worthwhile doing it this way instead?
Hi Jingle,
You now move to a different issue and that relates to CGT.
If you live in the property first you can have a further 6 years of CG tax free status.
If you rent the property first then the CG tax free status only starts when you move into the property and remains in place while you live in it and can be extended a further 6 years when you move out (with conditions)
If the period as a rental property is short then the downside is relatively small – if it is for a longer period of time then the tax impost may increase.
Having said all of that – tax benefits should only be considered as supplementary to your investment decisions. After all you should be planning to be a profitable property investor who makes money and may well incur some tax liabilities along the way. I am sure sure you are not planning on losing money as a property investor just to save tax.
I agree with PLC, reno sounds like a capital improvement, tax deductions over time via depreciation/capital works deductions.
Can move in and do the reno, then move out and rent out.
- Reno costs are capitalised into the cost base of the property for CGT purposes
- Property will be eligible to be claimed as your PPOR for up to six years after you move out (though remember you can only have one PPOR at any point in time)
- Once the property is rented get a quantity surveyor to assess the construction cost of the buildings etc (this will capture the reno costs) and start claiming depreciation/capital works deductions (capital works deductions reduce your CGT cost base)
If you rent the property out first, then move in and reno, CGT will apply on the value increase from the time purchased to the time you move in and claim PPOR exemption.
Also this is your first home! You don't want to miss out on the FHOGs which you might if you don't move in straight away.
Jinglebell,
I agree with the comments above. From the information you have provided, I would recommend moving into the house when you buy it, doing the renovations, then renting it out for a few years.
The benefits are, being eligible for the FHOG, claiming depreciation on the renovation costs, and the property can remain CGT exempt for 6 years after you move out (if you are not claiming another PPOR for CGT purposes).
Regards,
Cubez
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