All Topics / Value Adding / When to do renos – tax implications
Hi guys,
I have a property under contract and am considering setting it up as a lease option, to increase cashflow (should be cashflow positive). However, I would like to be able to draw some equity out of it asap so that I can use it on a new property. The place had an old lady living in it so it’s just a bit dated but perfectly liveable. I’m planning cosmetic stuff – plaster, paint, carpet, and possibly some touch ups in the bathroom and kitchen such as new cupboards, new taps etc.
As I understand the tax implications, if I do the work now it would not be considered maintenance and therefore I could not claim it as a tax deduction. A colleague suggested waiting 12 months to do the work and renting it as it is for the time being.
My preference is still to do the work now, claim more rent for the next 12 months, set it up as a lease option now and claim the option fee over the next 12 months, access the equity, buy another IP, and make money on that IP over the next 12 months.
However, I don’t know much about these tax implications, and would like to inform myself before I choose to go one way or the other.
Are there any opinions out there about when the optimum time is to do these cosmetic renos?
Thanks for your time.
Puting in new kitchen cupboards, taps are improvements whenever you do them. Not maintenance.
If you want to draw equity now, why wait. The cost of lost earnings with what you can do with the money would out way tax deductions I think. We always reno straight away, thereby gaining instant equity plus making properties CF neutral at positive from day 1.
I don’t know how the option ties in.
Thanks Catalyst, that’s helpful and makes good sense.
The relevance of the lease option is you’d be looking to place tenants for a longer period (or for good if they buy the place), so realistically I guess you’d have to wait until renos are done to commence a lease option. So it’d be 12 months of a normal lease, then renos, then lease option v renos then lease option.
makes sense to reno immediately to increase equity/cashflow and access further deposits for next deal. Simple stuff that ive forgotten. Does your lender allow you to access equity within 3-6 months or do you have to wait a full year.
cheers
It depends on the bank. Some will not revalue under 6 months. They don’t believe it can change that much in that time. Uneducated that they are!!! One I did I bought for land value as it was fire damaged. We spent $25K on the reno and we could have sold it for at least $90K more than we paid for it.
I’ve not had to reval early as I had enough equity.It depends on the bank. Some will not revalue under 6 months. They don’t believe it can change that much in that time. Uneducated that they are!!! One I did I bought for land value as it was fire damaged. We spent $25K on the reno and we could have sold it for at least $90K more than we paid for it.
I’ve not had to reval early as I had enough equity.Not only will some not allow a new valuation if it’s under x months, valuers will also struggle to attribute a higher value until it’s 6+ months from sale, even when there was clear under market purchasing.
The easiest way to get around this issue is to do significant renovations, then the valuer can attribute the value increase to the works completed.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Thanks corey, makes sense to reno significantly, our broker has paired us with westpac and apparently is able to get a reval under 6 months…which he has done for other beinvested clients..I wonder if its because we only buy in major capital cities ( hopefully at a discount) and put in 20% deposits, stamps, and legals all upfront?
if you still have the appetite corey, how do you go about your research to do a quick reno turnover. I am trying to follow steve mcknight and dymphna’s approach of finding something regional that can be improved and then put back onto the market so looking at: the size of each market, how many houses for sale versus how many under contract…which gives me the percentage of houses selling at a given time, days to sell, renovated versus unrenovated prices, etc etc. I am new to this so trying to figure out the best approach…i have a free 21 day access to propertyinvestar but haven’t logged on yet as i want to do as much research and not waste the 21 days. Okay thats enough from the newbie.
thanks again
oops credited corey and not you for your comments, i wonder if you could a second or two to look at my comments and reply please.cheers.
okay stuffing this up…thanks to both of you
Or it could be that at 80% lvr you never really know the true value of the property as Westpac will not do a full valuation……
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi guys,
As I understand the tax implications, if I do the work now it would not be considered maintenance and therefore I could not claim it as a tax deduction. A colleague suggested waiting 12 months to do the work and renting it as it is for the time being.
Waiting would not change the items into deductible.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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