Renovating an investment property can significantly enhance its value and rental appeal. However, many investors overlook the opportunity to claim depreciation on these improvements, potentially missing out on valuable tax deductions.
How to Claim Depreciation on Recent Renovations
When you renovate, you can claim depreciation under two main categories: Division 40, which covers plant and equipment, and Division 43, which pertains to capital works. Division 40 includes items like new appliances and carpets, while Division 43 involves structural improvements such as new kitchens or extensions. It's essential to distinguish between these to ensure you're claiming correctly.
A common misconception is that all renovation costs are immediately deductible. However, only specific depreciating assets can be claimed over their effective life, as determined by the ATO. For structural improvements, you can generally claim 2.5% per annum over 40 years.
How This Works in Practice
Consider a scenario where you have renovated a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane. The renovation included installing a new kitchen and upgrading the bathroom, costing $80,000 in total. Under Division 43, you can claim a capital works deduction of $2,000 annually (2.5% of $80,000). If you added new appliances worth $10,000, under Division 40, you could claim depreciation based on their effective life. At a 37% marginal tax rate, this could save you approximately $4,070 in tax in the first year.
Professional Insight
In our experience, one of the biggest oversights investors make is failing to obtain a depreciation schedule after renovations. This document is crucial for maximising your deductions. Another frequent error is not differentiating between plant and equipment and capital works, which can lead to incorrect claims. Many investors also neglect to consider items removed during renovations, which may qualify for scrapping deductions. Lastly, engaging a Chartered Quantity Surveyor early can ensure all eligible deductions are captured.
When Does the Answer Change?
The ability to claim depreciation may vary in several scenarios:
- Properties acquired after 9 May 2017: If you purchased a second-hand property after this date, you cannot claim Division 40 depreciation on previously used assets.
- Pre-1987 buildings: These typically aren’t eligible for Division 43 unless renovations have been completed since then.
- Commercial properties: Different rules may apply, particularly for Division 43 claims, which can often be higher.
- Partial year ownership: Depreciation is prorated based on the number of days you own the property within the year.
When Should You Seek Professional Advice?
Depreciation claims are complex and vary significantly based on individual circumstances. Engaging a Chartered Quantity Surveyor is crucial for accurate depreciation schedules, especially post-renovation. An accountant can assist in aligning these deductions with your overall tax strategy.