deductions on reno's done pre-settlement

[Nuthead]

Hi Everyone,

I have recently purchased my first IP in the blue mountains... rental returns are pretty crappy (in the vicinity of 4.2%) but capital growth prospects are good as far as I know. I am now looking for a few positive cashflow IP's to fund this one... seems pretty hard!

I've negotiated full access to the property before settlement to do cosmetic renos (painting/changing light switches/fixing a few cracked tiles etc...) as I thought it might save me a bit in holding costs in the time that the property could be tenanted. Anyway, I spoke to an accoutant about this and it seems that the costs of renovations done before settlement aren't tax deductible... is this right?

If so do you think it would be worth my while renoing before settlement or should I just wait till afterwards?

any replies will be greatly appreciated...

 

[MF35]

I believe "repairs" conducted on the property in the first 12 months are not tax deductible. So probably does not matter when you do them if you intend to do them inside the first 12 months. Any "Improvements" however may be depreciable.

No doubt the tax gurus (which I am not) will clarify this for you.

I have attached the ATO 2002/2003 guide for IPs to this post. Hopefully it works. If not you can get it off the ATO website.

MF

 

[DaleGG]

Hi

Renovation costs are not tax deductible regardless of when they are performed. However, they may be depreciable depending upon what exactly is done.

Dale

 

[geoffw]

I suspect there's some confusion by people claiming improvements incurred after a tenant has been in place as a repair.

If the place was bought in terrible condition, then the price of the property probably reflected the bad condition. So what was spent to make it better could not be regarded as a repair. Even if the palce had walls kicked in and graffiti all over, it does not constitute a repair to fix and paint it. Even if you've had a tenant in there in that bad condition for the 12 months.

Even if the purchase price did not reflect it- you cannot claim any improvement as a repair. Repairs can only bring it in line with original condition.

So renovations done before settlement are not claimable as repairs. Neither are renovations done immediately after settlement.

Advice from one who has been bitten- don't stuff with the ATO.

Like Dale says, you can depreciate some things. Maybe most (though some depreciation rates may be quite low).

You will get far better value by doing your reno before settlement than after as you will not be losing rent while doing your bits- the holding costs that you've mentioned.

Your risk is that if finance falls through the vendor gets the benefit of improvements.

 

[Nuthead]

Its always good to get quality replies on a forum!

If I've got this right, an improvement (reno) is never tax deductible (unless you claim it is a repair - in which case the ATO will probably catch you out)

a 'repair' is something done to bring the property back in line with the original condition at the time of purchase and is tax deductible if the expense is incurred 12 months after settlement.

So the most efficient thing to do in this case is to try to get as much renovation work done before settlement. Then get a quantity surveyor in to do a depreciation schedule?

 

[MF35]

Nuthead,

Sounds to me like you've got the right idea here.

You said, "So the most efficient thing to do in this case is to try to get as much renovation work done before settlement. Then get a quantity surveyor in to do a depreciation schedule?"

As it has the potential to get your place leased sooner and hopefully for more, and you aren't going to be able to claim it as a repair anyway (and will still get the depreciation either way if the work is depreciable).

I think the key for me in deciding on what is a "repair" is that the ATO use the word "improvement" as well as others. So if you do anything that improves or increases the capacity of what you are fixing, rather than just restoring it to it's original working order, you aren't "repairing" it as far as the ATO is concerned. You're improving it. You seem to have this under control I think.

MF

 

[geoffw]

Don't forget that anything you rip out has the potential to have had residual value, which can be written off in your depreciation schedule. For instance, you may have carpets with perhaps a few hundred dollars value remaining- which will be entirely written off if you remove it. So a QS before you start work may well be in odrer.

 

[Nuthead]

Thanks for the clarification

Thanks a lot to everyone that replied! I think you guys just saved me a few thousand dollars in a sentence!!

So GeoffW, can I get the quantity surveyor in to completely write off things that will be changed like carpet/existing paintwork/taps/curtains etc... pre-settlement then immediately remove them and renovate?

Also would I have to call the QS back after the reno's and get another DS done?

sorry if the questions sound stupid I'm still trying to get my head around all this!

 

[WillG]

Hi Nuthead,

The QS should put a value on the carpet before you replace it. You write off the value he put on it. You shouldn't need the QS to revalue the new carpet if you have the receipts for it.

Cheers

 

[Nuthead]

Hey WillG,

Thanks for the reply its all starting to make some sense now!

 

[strangep]

Bugger

We've just replaced a bathroom and didn't get the QS through before we pulled everything out.

Is there any way they could estimate residual values of fixture/fittings etc if I could get my bathroom guy to come up with the old stuff that he's ripped out??

I suppose if we can't get hold of the old stuff then we'll just have to forget about that side of it??

I'll definitely be getting him through now it's finished though. Just out of interest what sort of things in a bathroom are depreciable?? Or will most of the fittings etc just go into the low value pool??

Any comments greatly appreciated.

Thanks

Paul