Bathroom redo - tax question

Hello from a newbie.

Here is our scenario:

We own an investment property in a strata complex in Darlinghurst, Sydney.

The shower has started leaking. We've got some advice on it and, alas, it requires a gut and redo. We are getting quotes etc now. It will be completed by the end of the year.

I have two questions for the accounting brains:

1) Given this work is required, rather than something we are doing for cosmetic reasons, will we be able to claim the total cost of the work (approx $13k) as a deduction? Or rather, would it be added to the depreciation schedule?

2) Let's say the answer to the above question is that it gets added to the depreciation schedule. Now . . . when the shower is fixed, our son is planning on moving into the flat. He will live there rent free for about a year (until he finishes uni). For the time he is living there, we would not be able to claim any deductions on the property - no earnings, no deductions. I get that. But would that impact on our FUTURE ability to claim depreciation relating to the shower? Are we better off putting a paying tenant in there immediately after the shower is fixed?

Thanks in advance,

Harriet

 

It will depend on whether the work is a repair or a renovation.

A repair will remedy and fix the leaks and no more. Typically with less materials and merely sufficient to correct the leak. A renovation may gut the room and replace most or all the materials. ie floor tiles, vanity

A repair (only) is likely deductible
A renovation is not but would commence new Div 43 deductions
If the invoiced cost is a lump sum you will not have a basis to determine any deductible amount.

A scrapping report by your QS prior to commencing would also be advised.

HOWEVER, based on the changed use of the property ONLY a repair would be deductible or eligible for deductions. The fact the property use changes means the repairs need to be made asap but dont lose deductibility

 

Thanks.

It is a repair, but it will look like a renovation. We have patched the leak unsuccessfully on a number of occasions, and the advice now is that the only way to fix it properly is a full gut (in order to get back to bare bones and water-proof). Essentially, it is a renovation that we DON't want to do.

Anyway, I will seek further advice.

Thank you again.

 

$13,000 x 2.5% = $325 in deductions per year. If on the top marginal tax rate about $160 savings.

 

The ATO could dispute that. If the shower was removed and flooring and walls corrected and then retiled etc thats a repair. Any more is not unless it is required. eg remaining walls, new vanity etc etc. But the issue of waterproofing can affect this. You need to prove it was all necessary as part of the defect rectification. This could mean that the deductibility (in part) is then disallowed if you cannot. If the extent of the damage was extensive and needed all walls flooring etc to be removed (due to extensive water damage, termites etc) I would strongly encourage photos that depict major damage be retained and a written opinion by the repairer (on invoice) that the full removal of walls and flooring was necessary to repair the damage to the waterproofing etc. Then its likely to be OK. Also ensure that similar materials are used before / after to avoid an arguement that you enhances functionality or materials. eg : adding heated flooring, flash tiling etc may be more a renovation than a repair of a conventional "white tiled bathroom"

The ATO will often attack these deductions if the ceilings, windows etc are changed since they arent part of the leaky shower etc. So take care.

Replacement and repairs should never be confused. You would want to satisfy the ATO completely or they will just disallow it and allow you to object etc.

 

With a repair claim that big, the longer you have owned and been renting out the property, the better. You might be asked to prove there was not a hint of the problem when you bought the property.

 

Thanks, all.

Well, I am not a tradie. I can only go by what the plumber and water-proofer have told me - which is, the only way to fix the leak permanently and properly is to waterproof the entire bathroom. And to do this requires ripping everything out. Not sure any of them would put that in writing.

It will be straight-up new for old, because let me tell you, I can't afford anything more than that. We are actually keeping the existing vanity and all the taps etc, to save money.

It's not the end of the world if it ends up being depreciation only. I can live with that. And I suspect this is the way it will fall.

But then my next question is whether I will be able to start claiming these depreciation deductions a year or two down the track, when I put another paying tenant in there. Would it be "cleaner" to put a paying tenant in there immediately after the shower is fixed, and sort out some other accomm for my non-rent-paying offspring?

Cheers.

 

If the work is deemed improvements, they will be eligible to claim at 2.5%pa for 40 years. So when the very lucky non-rent-paying offspring move out, you start claiming.
If you have been renting the place out for while before the leak happened, you would have a good case for claiming a decent chunk of the work as repairs.

 

Thanks, Depreciator. I will pass on your note to my son, who - like many in his generation - doesn't quite get how lucky he is.

 

Maybe all his mates will tell him he's pretty lucky.

 

I think you need to read what is posted. If its repairs and its substantiated as repairs it may well be 100% deductible or some/most is deductible. The issue of depreciation would follow for what is NOT deductible.

These are reasons why personal advice is often preferable. Self diagnosis is only good as your comprehension

And what you are told by tradies wont count for jack if you are audited.

 

I did read it. And I am getting personal advice as well. Thanks.

 

Depending on condition, old vanity and tapware in a newly tiled bathroom can look really tacky.