5 Top tax tips for renovating a rental property
Whether you watch “The Block” or have experienced it first hand, being involved in renovating a property can be an exciting and rewarding endeavour. Hopefully it will not only improve the value of your property but you will also learn some things along the way. Painting and tiling skills aside, we can help you with some financial considerations before you get started.
Here are our top 5 tax tips to consider when renovating.
1. Repairs vs. improvements
The difference between a repair and an improvement can be confusing. If you repair something, you improve it – right? The answer is, it depends!
Broadly, an improvement means something works better than it used to and will increase a property’s market value or extend the likelihood of producing income.
A repair, on the other hand simply restores the asset so it works again (e.g. replacing a part or correcting something).
For tax purposes it is an important distinction to get right as a repair can be immediately deducted in the year it is incurred, while an improvement is treated as ‘capital’ and must be depreciated over its useful life.
To make things interesting, in some cases renovation costs can be considered both improvements and repairs so careful consideration is required.
2. Initial repairs
Contrary to the above, initial repairs made to fix pre-existing damage and enable a property to be used as intended (e.g. available for rent) are not allowed to be immediately deducted.
The initial repairs can only be claimed as a tax deduction through depreciation over several years.
Incorrectly claiming an upfront tax deduction for initial repairs has been identified by the ATO as a common tax mistake.
3. Owner-builders time
For our clients who are ‘handy on the tools’, it is not unusual to receive enquiries as to whether they could structure their affairs in such a way that it might be beneficial if they charged themselves for time spent building or renovating their own property as a way of reducing capital gains tax later on.
Unfortunately, you cannot bill yourself for the work you’ve done, but there is room to discuss options with relatives or related parties who provide these type of services.
Just researching the market?
4. GST fraud
Almost all trade invoices show PLUS GST. But GST can only be charged on invoices if you are registered for GST.
Occasionally we uncover invoices that have incorrectly had 10% GST applied to the balance.
Whether the person has ill intentions or not, the small mistake could be taking a further 10% out of your pocket.
A quick search of the ABN on https://abr.business.gov.au/ will show whether that person is registered for GST.
Tip: No valid ABN = No pay
5. Record keeping
To claim an immediate tax deduction (i.e. a repair) or an ongoing depreciation deduction (i.e. an improvement) you will need to keep adequate records.
When an amount is disclosed in your tax return, you will need to keep copies of tax invoices to support the disclosure for at least five (5) years from the date your tax return is lodged.
This information has been provided by our accountants, West Carr & Harvey Pty Ltd
General Advice Disclaimer: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
West Carr & Harvey Pty Ltd is a Corporate Authorised Representative (No.12137376) of Merit Wealth Pty Ltd AFSL 409361 | ABN 89 125 557 002