Deductibility of renovations

evening PCers

I am looking to purchase a new IP that requires immediate renovation prior to renting out. I will be using equity from another property to fund the reno. Will the interest be a deductible expense for the ip once it is rented out ? I seem to recall reading somewhere that it had to be rented out first then you could claim the interest but I may be mixing it up with claiming the cost of the renos.

Help would be greatly appreciated.

Thanks Logan

 

Yes, would generally be deductible.

 

As long as your intention is to rent then should be fine.

Only problem is when you intend to rent and then at the last minute decide to live in.

 

Thanks for the replies - it would be tempting to live in the ip but too inconvenient. Maybe a long (long) term holiday home when I have paid it off.

 

If you buy an investment property with the intention of using it privately once the property stops being negatively geared: the initial tax deductibility of the property should be called into question.

And this is a public forum.

 

Renovation costs are capital in nature and depreciated

Interest on funds used if drawn from a loc/investment split should be deductible

 

Not sure what is ment by this ? The intention is to use the property as an investment. If in some future time I owned the property outright with no loan and decided to move into it then there would be no deducability.

 

1. Loan interest deductible from time it acquired if the intent is to do work and then promptly list it for rental. (Steele's principles apply)
2. Renovation costs are not deductible as an inital repair and are capital expense. QS report may enhance the deductions over time.

 

Hence i now ask the tenant to pay for renovations
(Ps i have tenants paying off $200k renovation ...doing a $50k refurbishment now ..tenant will repay me over 24mths)

 

How do you do this? Raise rents by ~$480/wk?

 

Yes
One tenant is paying me $210k over 6 years
Another is paying me $50k over 2 years ...it is at $42k so far alteration not yet finished

 

Strange arrangement. The larger the reno the higher the safety risks and the disturbance to tenancy. And the more likelyhood of a increased FUTURE rent v's lower current rent for the inconvenience and disruption. Few tenants would tolerate such a issue. I couldnt think of manythings worse.

1. How to manage safety and other risks ?
2. How to reflect rent change v's "tenant paying for reno"....I would imagine a tenant would only pay for what is presently available as they have no ongoing rights. Punt them on completion ?
3. Why would a tenant pay based on reno cost ? This is what yield reflects. At a 7% yield the additional rent for a $200K reno should be $269 a week compared of course to market rents. WHEN Its completed. I would argue during reno the rent should be far less than market. Averaged out to a fair position....

Also you are receiving higher assessable income over a short term in exchange for capital allowance deduction increases which you claim over 40 years. However that may also not commence yet ? So you pay more tax...

This sort of issue is more common to commercial tenancies but agreed in advance of the lease. It is recouped over longer terms. eg custom fitouts, partitioning

 

@Logan I think what @Ross Forrester means is that the ATO can readily see comments made on a public forum - so if you changed your mind about the use of the property but still claimed the interest, the "intent" would be clearly visible and used against you as "evidence".

 

Sorry for the delay Logan.

A lot of taxation law rests with the facts - including your intention. If you buy a house with the intention of renovating and to then live in - and you rent the property simply while you get finances in order: their could be a case to argue that some of the holding costs of the property while rented are private in nature.

For most it is not a massive concern as their intention varies a bit and they are effectively unsure. However if you do something like posting your intention on a public website that could be a clear indicator of what you are doing - especially if you then go and do it.

A lot of taxation is simple conceptually: but the facts are always different and lining up your facts to the desired answer is very complex.

These posts are all just a high level thought bubble from me. I just get concerned when I see people posting about what they will ultimately do with a property.

 

All commercial
No residential
At the end of the tenancy the fitout may be required to be removed.
Still these numbers are pretty small compared to the money others have invested in their buildings on my land

 

I agree ..people need to seek specific professional advice...there are too many avenues for errors by relying on posting that may not be be relevant

 

@Beano are you talking fitout which is generally paid for by the commercial tenant or a renovation on a CIP?
Dunno why you'd be funding the fitout?!?!?
I think the closest thing we've come to a renovation on a CIP is putting in a new air con system.

BTW are you a commercial leasing agent or asset manager? You say 'my' a lot but unless your a Packer your portfolio is out of this world.

 

I did ask that final question as it seemed unusual for resi. Commercial leases are generally for long duration and these incentives are built into some leases as an incentive. The same cannot be said of residential tenancies where the product has shorter leases and the product tends to be more homogenous.

The tax issues with fitouts can be problematic for a owner. In place of depreciation under normal tables such fiitouts should be written off over the lease term (the effective life of the asset) to avoid book value write off at the end and also to avoid taxation of the higher lease payments. This is permitted under the "effective life regime".

These, and other issues, are very unique for commercial prop owners. Many resi property owners get surprised when I explain that land tax doesnt truly apply to ownership of many commercial property owners...Why ? The tenant pays the land tax which is assumed as an invitable outgoing.
Commercial land can be a good strategy to avoid land tax but it has long term issues

 

I only fund a fitout if eventually i can change a premise to a " higher use " of the premise eg changing a warehouse to office , office to retail etc OR the property that has been vacant for a while
That said ...I agree with you I don't like funding a depreciating asset
I have switched to land only where the tenant funds the whole building and renovates it himself . (These funding of tenants fitouts relate to my "old" me when I brought conventional commercial properties. The " new me " is different now!
Not I ....I am not a agent or property asset manager
I am just a average joe with a few properties that I rent out.
Hardly something to write home about. ...
Ps I am not a Packer or Lowry!

 

Hurrah!
Finally found some who understands the mismatch of buying a assets (payment in year one) that the tax deduction (deductions in year 1 to year x)
That is why i prefer to buy only the land and not the building (and fittings)
The tenant can buy the building and keep the depreciation ....
As far as i am concerned depreciation is NOT a benefit to me (when I need to buy a building/fitout to get the deprecation )