Depreciation Changes on a Renovated house

Hello,

I have done a bit of research and from what I can tell buying a renovated house is a terrible idea given the latest changes to depreciation. If my understanding is correct then there must be quite a few people struggling to flip property.

This house for example is very close to where I live. As can be seen in the photos, the whole house has been tastefully renovated inside. New plaster board, painted, tiles, carpet, window shutters. New kitchen and bathroom etc. Simple and clean, nothing overly fancy. The house was built in 1979.

I'd guess that the idea behind the renovation was to raise the sale price of the house by at least $100k.

As an investor, the increased sale price was justifiable a the depreciation was higher. These days, from what I understand there would be no depreciation on this house what so ever. The house itself is too old for construction costs and the renovations inside the property are not deductible because they are all second hand.

For an owner occupier, they might not care and would still pay the higher price.


Am I right or not?

 

No depreciation doesnt mean a bad investment

 

I understand that. I'm really just trying to make sure I understand the new rules right.
I'd like to make another purchase if possible in the next 18 months. So I'm wondering about the pros and cons of buying a older house in need of some repair vs buying a house in good condition.

 

Sort of, but not quite.

What's not depreciable are the plant and equipment items (AKA fixtures and fittings). What is depreciable is the structural work, and there's plenty here, such as the rendering, cabinetry, tiling, decking, and more.

The issue is: given that the claim on structural work is comparatively smaller on a per-annum basis, is there enough value in the structural renovations here to justify the spending on a depreciation schedule? It could potentially take a few years for the new owner's tax savings to get them to the point where they're breaking even on the fee they've paid a quantity surveyor for the report. Even if the result justifies the spending on a depreciation schedule, it might only be a yearly claim of $1500-$2000 in deductions, which will give someone a positive return but couldn't exactly be called a goldmine.

 

Is it worth getting a schedule done on a property I have just cosmetically touched up?
We have only done the following:
-New floating floorboards throughout approx 3.5k
- new shower screen
-new floor tiling to bathroom floor and kitchen splashback.
-new tapware throughout whole house (3bed, 1 bath)
-installed new roller blinds throughout
-painted entire interior
-replaced Ann internal doors and door handles
-new wardrobe mirror doors to one bedroom-installed additional pantry cabinets x2
-new toilet and new hot water service.
@BMT Tax Depreciation what sort of depreciation value would this add? Obviously I won’t hold you to it but just trying to figure out if it’s worth it this time

 

Maybe, maybe not. I need more information about the property and your history with it.

* When did you buy it? Have you lived there? If so, until when?
* From the way you're talking, I assume the original building age is pre-1987. Have there been any other significant upgrades in the last three decades?
* Depreciation of renovations is directly related to costs. Approximately how much in total did you spend on the above works?

That will give me a clearer picture of your entitlements.

 

We have spent around 12k
1970 build
It already had a newish kitchen approximately 5 years old perhaps a cheap Bunnings kitchen it looks like
It has bathroom and laundry floor to ceiling ceramic retiling of walls approx 10-15 years old
Other thank that nothing looks updated.

We have never lived in it and never will. Purchased Jan this year @BMT Tax Depreciation

 

Given the new rulings prevent a depreciation claim against existing plant and equipment, and the overall lack of substantial improvements, I would probably just take your costs to your accountant and let them sort it out.

 

Thanks, I really appreciate you being upfront. I hope these new legislation changes haven't impacted your business very much.

 

Thanks for the kind words. It's a bit of a pain but we're surviving! The reality is that it only really takes about 10% of properties out of contention that we would previously have been able to help with, though of course there are reduced claims for another percentage.

 

I keep saying it - Dont assume the changes arent worth a QS report. In many cases the benefits are still available in full, in others they are reduced. Over time this will continually need review.
No better time to make sure all investors rely on their QS for advice.

The trap many will fall for has already commenced review by the ATO. People who have lost entitlement to depreciation eg
- Wasnt rented in the period 8th May - 30 June 2017
- Property has been for a non-income producing purpose even short term
- Change in property use (eg Airbnb part of own property)
- Occupied by owner even if its just for quick repairs / reno
- Holidays let used by the owner, family or friends for even one night

Part of our job is now to ask questions about use of a property even owned for 10 years. Deductions for Div 40 can easily end. If it does then the non-deducted depreciation can provide a deferred tax benefit when the property is sold so less CGT is paid.

A QS can produce a different QS report that tells you what the CGT reduction will be. Along with the capital allowances etc