Converting IP to PPOR - What Can Be Claimed?

We are thinking of converting one of our IPs into our PPOR.

Obviously, the IP has suffered wear-and-tear while being rented by tenants.

I have been told that we can do a cosmetic renovation and claim the costs as a tax deduction against the rental, items such as:

• Painting of the Internals
• Replacement of carpet
• Replacement of window dressings

Can we do this? If yes, what are the rules around this? For example:

1. Is there a minimum time for the IP to be a rental before doing this?
2. Must the IP be re-rented after the renovation before one can claim?
3. If so, any minimum period of re-rental?

We will be checking this out with our accountant but I thought I would get feedback from PC before doing so.

 

Get all done in this FY and then move in next FY?
I'm not tax accountant ...

Otherwise, maybe reno, short term rent it then move in

 

We were told by our accountant that once the tenant left, if the property was no longer available for rent then refurbishing was considered an improvement and not deductible.

This was quite a few years ago, things may have changed.
Marg

 

They're all major refurbishment items. So it's likely they'll only be good for depreciation (not a 100% deduction) and only if the property was to remain available for rent after the work was done. I don't think the property actually has to be rented out, but it would have to be listed for rent and you'd probably have to prove that you were making an effort to place a tenant in the property.

Why risk the extra wear and tear though?

 

That is what I am trying to get my head around. There are four possibilities, namely:

1. The current tenants are very good and we get on well with them. So we could do the reno while they are there.

2. We could wait until the lease expires and the tenants vacate, then do the reno and then sign up new tenants for 6 months.

3. We could wait until the lease expires and the tenants vacate, then do the reno and then list the IP for rental but not get any tenants (for whatever reason).

4. We could wait until the lease expires and the tenants vacate, then do the reno and then we move in.

It seems like for the first three the cost is deductible but the 4th may not be. To me, that doesn't make a lot of sense. The damage was caused while it was rented.

 

I don't believe they are all major refurbishment items. For example, I know you can't depreciate paint. Replacement of carpet and curtains/blinds I would need to check.

I agree. I am trying to ascertain whether it is worthwhile or not.

 

Repairs to correct tenancy related defects may be a repair cost that is deductible and no you dont have to incur the cost while its tenanted. eg interior painting etc. But the deterioration must relate to the tenancy period. ATO agree on that :

If you no longer rent the property, the cost of repairs may still be deductible provided:

• the need for the repairs is related to the period in which the property was used by you to produce income
• the property was income-producing during the income year in which you incurred the cost of repairs.

Note carefully the underlined bit. ATO view is the repair must pretty much immediately follow the tenancy. Dont leave it. Also you can expect that if its reviewed a skeptical ATO staffer would query more than a cost incurred during tenancy so be diligent and dont push it.

But ....capital expenses cant be deductible. eg replacing carpet, kitchen appliances or the kitchen itself etc.

My tip is to also review QS report and identify if anything is obsolete prior to tenancy ending. eg former carpet. old oven, former split system being replaced.

 

Funny, I thought that painting is part of capital works? Claimable at 2.5%pa. I could be wrong, and don't have my current dep schedule to hand.

 

Thanks @Paul@PFI. Now that is starting to make sense. Painting is deductible but carpet/window dressings aren't.

@Paul@PFI, can you provide a few more details about what you mean by this?

 

See @Paul@PFI post above.

 

Reckon #3 would be a very risky strategy.
Marg

 

Agreed

 

Not if its a repair. Painting a new IP would be a element of the construction cost and costbase eligible for Div43.

 

You assess the QS report on the final rental day. The AC unit is about to be replaced by a new unit in YOUR home. So the old unit is scrapped. On the final day of rent it has no effective life. The residual value MAY be written off provided its not in a pool and still has a written down value.

 

Agreed

 

I didn't think of this.

I will go through the Depreciation Schedule and see whether there are any candidates.

Thanks @Paul@PFI

 

When was this IP last painted or carpets replaced ?
If you get along well with the tenants you cold organise plaster "repairs" and painting.
Who's to say that the main bedroom worn carpet wasnt accidntally ripped and require replacing (due to trip hazard) as a generous landlord.......
Option 3, why not, if its worth $400 a week to rent, advertise it for $550pw, after 3 months just start lowering the asking price by $5 each month, if someone comes along at $500pw I'm sure you would happily move again

 

Prior to us buying the property, probably 8 to 9 years ago for both.

That sounds like I am stretching the truth a little, I am not convinced it would be worth it.

Hmmm.

 

The property needs to be genuinely available for rent. Advertising at 25% + over market rates would be a massive red flag and likely demonstrate that you are avoiding having the property rented out...especially after you've just done renovations and claimed a larger than normal tax deduction for R&M.

 

I thought it sounded dodgy .