Renovating your investment property can significantly enhance its value and rental appeal. However, many investors overlook the importance of updating their depreciation schedule post-renovation, potentially missing out on significant tax deductions.
Why Updating Your Depreciation Schedule After Renovating is Essential
When you renovate, any new assets installed or structural improvements made can affect the depreciation deductions you can claim. Under Division 40 of the ITAA 1997, new plant and equipment, such as appliances or carpets, can be depreciated over their effective life. Similarly, Division 43 allows for deductions on capital works, like extensions or structural renovations, over a period of 40 years. The most common misconception is that a depreciation schedule only needs to be set up once, but in reality, it should be updated to reflect any changes made to the property to maximise tax benefits.
How This Works in Practice
Consider a scenario where you own a 2009-built, 2-bedroom apartment in Fortitude Valley, Brisbane, purchased for $700,000. You decide to renovate the kitchen and bathroom, spending $50,000 on new cabinets, appliances, and fixtures. By updating your depreciation schedule, you can claim deductions on these new assets. Assuming a 37% marginal tax rate, this could result in additional tax savings of approximately $2,500 in the first year alone, depending on the effective life of the new assets.
Professional Insight
In our experience, failing to update a depreciation schedule is a common oversight among property investors. One thing we frequently see is investors underestimating the value of smaller renovations. Even minor upgrades can contribute to significant deductions. Another common issue is not retaining receipts or detailed records of the renovations, which can complicate the updating process. What most investors don't realise is that even demolishing parts of the property can offer deductions through scrapping, where the residual value of removed assets can be claimed.
When Does the Answer Change?
When Should You Seek Professional Advice?
Updating a depreciation schedule can be complex, especially when renovations involve multiple components. It's advisable to consult with a Chartered Quantity Surveyor who can provide a comprehensive depreciation report, ensuring no deductions are overlooked. An accountant should also be involved to align the depreciation schedule with your overall tax strategy.