LMI and Renovations deductibility

Hello Guys,

one question in regards tax deductions related to property.

In the given scenario where one is thinking on buying a property to use as PPOR to convert it to an IP after 2 years, getting a home loan @95% LVR and therefore having paid said $30k in LMI. How does the Tax deductibility of LMI goes on this?

My understanding is that if you buy a property starting as an IP the full amount of LMI is tax deductible over a 5 year period after acquisition. However, because the purpose of the loan was initially to get a not income producing asset to start with, is one still eligible to claim the cost of LMI for the period corresponding to the 3 remaining years after the property has been converted to an IP? Or not at all because the purpose of the borrowing was for a home buying initially?

In the same order of ideas, how do the expenses on renovations go? Say yo buy a house and renovate the kitchen and bathroom in the 2 years you lived in it, and then convert it to an IP in the 3rd year. Are you entitled to claim the cost of the renovation in full? Or do you have to do the renovation whilst the property is empty or rented for it to be claimable?

If the case is that you can not claim any renovation as a tax deduction if you are living in the property, aren’t you better off just buying a property that has already been done up? At the end of the day you won’t get any tax benefits by doing the hard yakkas yourself.

Would appreciate any comments from any of the tax savvy members or profesional accountants in the group.

 

@Terry_w

 

@Paul@PAS @Mike A

 

LMI is deductible over 5 years with the first and last years apportioned.

so if you lived there for 2 years and then rented it out, approx 3/5ths of the LMI could be deductible over the following 3ish years.

 

Thanks a lot!

What about costs of Renos?

 

If you borrow to renovate or improve a property the interest could be deductible. The reno costs themselves would generally be depreciated depending on what you will be doing.

 

Say I was going to renovate the kitchen and bathroom and replace the carpet flooring for timber boards.

How do you go about it when you do the Reno in the 2 years you have been living in it and then move away to convert it into an IP.?

 

If you do building works you can depreciate this after you move out. If you install plan and equipment, such as a stove, you will not be able to claim this but you can depreciate it after rented only if it is installed after you move out.

 

Ahaaa!!

Feels like I am reading some gold here!!

So if I buy a new dishwasher, stove, oven, and kitchen fan on my first year living there, but keep it in its boxes for one year and install them the day after I move out the property, I can depreciate them?

What would the ato ask as evidence they were not installed prior in case you get audited? Photos with dates?

 

that is something you would have to ask a tax agent about. @BMT Tax Depreciation might be able to answer it.

I believe, off memory, that the law requires the item to be 'new' or 'not used'.

 

Yes, that's correct.

Plant and equipment can't have been used prior to income availability and must be new (not second hand). We'll ask for the installation date. If it's after the date the property is available for income (usually when you move out), we include it as a deduction. If not, it goes into the capital loss schedule.

As for the burden of proof, we can't advise on that, I'm afraid.

 

Renovation costs are likley to be non-deductible but may be Div 43 assets eligible when it is rented for 2.5% capital allowances. A QS could advise on this incl the existing structure prior to reno...ONCE its rented. However in terms of deductibility as repairs ONLY costs that are attributable to tenant wear and tear and damage that occur and are repaired after they commence tenancy will be eligible.

If you want to maximise deductions you could BUY the asset new just prior to vacating. If they were acquired well before the ATO wouldnt believe it was installed later without trade proof of installation later. With warranty issues it doesnt make sense to pay now and install much later. Given the tax benefits for appliance depreciation may be worth perhaps $2K its more rational to contruct a new kitchen and install appliances when you live there and ignore depreciation. Or you can put up with old appliances and give the tenant new appliances. Tax deductions are a trivial element of life v enjoyment of the home.