Rent PPOR then sell spend all money now on updates or after rental ends

[warek]

Hi there

Our PPOR is looking a bit dated, but in sound condition, built in 1988, 100 km from Melbourne in a growth corridoor. Summerhill pink bricks with some internal brickwalls, apricot fluff painted wall, and exposed cathedral beams, cedar ceiling and pine ceiling boards in living areas and ceiling fans. Current value 500000, low density residential on 5000 sq metres in a good part of town.
We are planning to move in 3-4 years to our IP. I am keen to relocate, but wife is not sure she wants to move. As a compromise we plan to keep our exisiting PPOR as rental for 2 years until she can decide if she is happy in her new location. Based on current condition house only needs sun damaged carpet section replaced.

My initial thought was to plaster over internal summerhill brick walls in living room, 1 bedroom, hallway and study and replace carpet and repaint. Carpet is original and is now rotten, effected by north sun for a 30 cm strip along north facing windows in 1 bedroom, and dining, family room. The rest of the carpet is still ok.

We like timber flooring and though of bamboo flooring in living rooms, dining and kitchen, perhaps 130-150 sq metres of bamboo flooring.

Preparing for rental, is it better to get a new strip of carpet that matches and replace the sun damages section and delay all plastering, painting, new carpet and flooring until we either return or decide to sell. Or perhaps do plastering, minimal painting, carpet repair and delay new bamboo flooring and entire house repainting until after rental ends. Or spend 25000 now get benefit for next 3-4 years, increase rental appeal and do floor sanding, carpet steam cleaning and repaint when rental ends.

Thanks for any input.

 

[Brady]

Hi there

Our PPOR is looking a bit dated, but in sound condition, built in 1988, 100 km from Melbourne in a growth corridoor. Summerhill pink bricks with some internal brickwalls, apricot fluff painted wall, and exposed cathedral beams, cedar ceiling and pine ceiling boards in living areas and ceiling fans. Current value 500000, low density residential on 5000 sq metres in a good part of town.
We are planning to move in 3-4 years to our IP. I am keen to relocate, but wife is not sure she wants to move. As a compromise we plan to keep our exisiting PPOR as rental for 2 years until she can decide if she is happy in her new location. Based on current condition house only needs sun damaged carpet section replaced.

My initial thought was to plaster over internal summerhill brick walls in living room, 1 bedroom, hallway and study and replace carpet and repaint. Carpet is original and is now rotten, effected by north sun for a 30 cm strip along north facing windows in 1 bedroom, and dining, family room. The rest of the carpet is still ok.

We like timber flooring and though of bamboo flooring in living rooms, dining and kitchen, perhaps 130-150 sq metres of bamboo flooring.

Preparing for rental, is it better to get a new strip of carpet that matches and replace the sun damages section and delay all plastering, painting, new carpet and flooring until we either return or decide to sell. Or perhaps do plastering, minimal painting, carpet repair and delay new bamboo flooring and entire house repainting until after rental ends. Or spend 25000 now get benefit for next 3-4 years, increase rental appeal and do floor sanding, carpet steam cleaning and repaint when rental ends.

Thanks for any input.

Check with accountant on the deductability of doing the renovations before you have a tenant in the property.

Also check with an agent of the increase in rent p/w after renovations vrs the costs of the actual renovations.

 

[DaveM]

Since its not tenanted and the reno costs cannot be attributed to it being tenanted, they will be initial repairs and depreciated at a measly amount, probably 2.5%

 

[warek]

Maximize tax deductability

Ok assume I do minimum now and patch up sun damaged carpet and wait for most of it and do it in the financial year the lease ended.
Just guessing regarding amounts but how would these items be treated.1 repairs or assets and depreciated?

Eg Plastering 3000
Painting 7500
Replacement carpets 6000
Bamboo flooring 10000

Will check with my Acountant later in the year, but just trying to clarify my thoughts and questions. Is this now a question that I should be posting in the Accounting and Tax forum. Is it ethical to repeat same post, but I guess focus has now changed a little

Thanks

 

[warek]

How to maximize tax deductable of home improvements on PPOR-IP

Hi there

We have a PPOR that we have lived in for 24 years and an IP. We intend to move to the IP, but my wife is not convinced she wants to move. She is prepared to try it for 2 years as long as she has the option to come back if not happy.

Seems like an ideal situation to lease out the existing PPOR for 2 years in the future. After the 2 years we intend to sell the property or move back. Would be nice if we could get some improvements /upgrades and get some tax deductions as part of the costs?

The house needs some minor maintenance to get it ready for rental, but would benefit from some new carpets, repainting inside, new bamboo flooring, and plastering over 20 year old internal brick walls, bathroom and ensuite update to modernise the house for the sale.

If I do the minimum now in preparation for leasing and wait for most of the maintenance/upgrades and do it in the financial year the lease ended what is the tax deductability of my costs?

Just guessing regarding amounts but how would these items be treated. Repairs, assets/improvements and depreciated, or part of cost base when calculating CGT on the sale

Eg Plastering 3000
Painting 5000
Replacement carpets 3000
Bamboo flooring 10000, instead of replacing carpet and lino in Kitchen, living areas
Bathroom upgrades, basins taps and toilets 3000
Replace electric HWS 1500

I will check with my new Accountant later this year, but just trying to get some initial thoughts to make sure I ask the right questions.

Thanks for any suggestions

Kevin

 

[MRO]

I would consider your options first. At the moment the property could be sold CGT exempt but after two years you would need to apportion any growth.

Why do you want to rent it out for two years first?
WHy not do a quick reno and flick it now and move on?

Just something to think about..

 

[warek]

Why not sell now

Thanks

Updated case above, did not think it was relevant at first , but to avoid confusion added more information to clarify our situation.

 

[DaveM]

Again, if the works cannot be attributed to a period when the property was tenanted, they are going to be capital works related and will most likely be depreciated at 2.5%

 

[Mry]

I would consider your options first. At the moment the property could be sold CGT exempt but after two years you would need to apportion any growth.

If it was a PPOR for the entire time of ownership, the cost base would be the market value when they moved out. If they didn't claim the new house as their PPOR, this house would be tax free for up to six years rented. If they claimed the new house as their PPOR, this house is taxable from day one.

If you repair items while living there prior to renting out the property, you get nothing (eg painting). If you make improvements, you can depreciate those after leaving the property (eg hot water system).

Have a look at TR 97/23 for more information, specifically, 76-77.

76. In appropriate circumstances, expenditure for repairs can qualify as a deduction even though the property has previously been held, etc., by the taxpayer for non-income purposes. This situation is different from an initial repair done to newly purchased or newly leased property, where the repair expenditure is capital expenditure.

77. A deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income purposes:

(a)
even though the property has previously been held, etc., by the taxpayer for non-income purposes; and

(b)
even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer's holding, etc., of the property before its holding, etc., for income purposes; and

(c)
provided that the repair expenditure is not capital expenditure.

 

[warek]

Thanks MRY

Interesting, seems to be promising. Do you have any thoughts about the bamboo floor replacement compared to replacing worn carpet. Do you think it might be a capital item as it could be viewd as an upgrade rather than a repair?

Thansk

Kevin

If it was a PPOR for the entire time of ownership, the cost base would be the market value when they moved out. If they didn't claim the new house as their PPOR, this house would be tax free for up to six years rented. If they claimed the new house as their PPOR, this house is taxable from day one.

If you repair items while living there prior to renting out the property, you get nothing (eg painting). If you make improvements, you can depreciate those after leaving the property (eg hot water system).

Have a look at TR 97/23 for more information, specifically, 76-77.

 

[warek]

Thanks for the reply

Appreciate your thoughts

Again, if the works cannot be attributed to a period when the property was tenanted, they are going to be capital works related and will most likely be depreciated at 2.5%

 

[HD_ACE]

kevin, you can not claim anything as a repair unless it is an income producing assest.

The only thing you can do is depreciate any capital works, once its producing income.

you can claim repairs once its an ip but any major or alot of repairs right after renting out may be frowned upon by the ato.

cheers

 

[depreciator]

Do you have any thoughts about the bamboo floor replacement compared to replacing worn carpet. Do you think it might be a capital item as it could be viewd as an upgrade rather than a repair?

Floating bamboo flooring or solid? I'm pretty sure it's possible to get solid bamboo flooring.

If it's floating, 13.3%.

If it's solid, 2.5%.

 

[warek]

Could not claim any depreciation of new flooring?

Hypothetical situation, we lease for 1 year and then another 10 months of financial year and in last two months repaint and replace carpets.

Actually either way it may not matter because if replacement of flooring is a capital nature and depreciated, rather than a repair, by the time I replace carpet house will not be leased, have no rental income and in theory would have no deductable expenses. Could not claim any of the depreciation against the 10 months for the new flooring, but could depreciate original carpet. Would this be correct?

RE Painting not sure how much you could allocate as a repair?

Floating bamboo flooring or solid? I'm pretty sure it's possible to get solid bamboo flooring.

If it's floating, 13.3%.

If it's solid, 2.5%.