Renovating an investment property can provide significant tax benefits through depreciation. However, understanding how these renovations impact your depreciation schedule is crucial for maximizing these benefits. Renovations typically affect both capital works (Division 43) and plant and equipment (Division 40), and knowing how to adjust your depreciation schedule accordingly can save you money and improve your investment's profitability.
How Renovations Affect Your Depreciation Schedule
When you renovate, you're essentially adding value to your property. Under Division 43 of the Income Tax Assessment Act 1997, you can claim depreciation on the structural elements of your renovations, such as walls, roofs, and fixed assets like kitchen cupboards, as long as the construction commenced after 16 September 1987. For plant and equipment, which are typically removable or mechanical items like air conditioners, carpets, and blinds, Division 40 applies. A common misconception is that any renovation automatically increases depreciation claims, but you must have a valid depreciation schedule that includes these new additions.
How This Works in Practice
Consider a scenario where you purchase a 2005-built 3-bedroom house in Richmond, Melbourne, for $850,000. You decide to renovate the kitchen and bathroom, spending $50,000. Before the renovation, your annual depreciation claim was $8,000. Post-renovation, your quantity surveyor assesses the new kitchen and bathroom under Division 43, adding $40,000 to your capital works deductions. Additionally, new appliances and fixtures worth $10,000 are added under Division 40. This increases your annual depreciation claim to $13,000. At a 37% marginal tax rate, this adjustment saves you an additional $1,850 in tax annually.
Professional Insight
In our experience, many investors underestimate the impact of renovations on their depreciation schedules. One thing we frequently see is investors failing to update their schedules post-renovation, missing out on potential deductions. What most investors don't realise is the importance of a professional assessment by a Chartered Quantity Surveyor to capture every eligible deduction. Another common oversight is misunderstanding the effective life of new assets, which can vary significantly and affect depreciation rates.
When Does the Answer Change?
When Should You Seek Professional Advice?
It's essential to seek advice when you're unsure about the depreciation implications of your renovations. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, ensuring you claim all eligible deductions. Your accountant can integrate this into your overall tax strategy, particularly if your renovations are part of a broader investment plan.