Renovating a rental property is a powerful way to boost its market value, attract quality tenants, and ultimately increase your return on investment. Whether you’re giving an old kitchen a modern makeover or updating the outdoor area, renovations can enhance both the functionality and appeal of your property.
What many property investors may not realise, however, is that certain renovation costs may be eligible for tax deductions—potentially saving thousands of dollars over time. Understanding how these deductions work, how to claim them correctly, and how they affect your capital gains tax can help you make more strategic financial decisions when investing in real estate.
Tax Deductions for Investment Property Renovations
- Renovations and Immediate Deductions
Unlike day-to-day rental expenses like insurance, council rates, or property management fees, renovation costs cannot typically be claimed as immediate deductions in the year they are incurred. Instead, these costs are generally claimed over time under capital works deductions, allowing you to gradually reduce your tax liability over multiple years.
- Capital Works Deductions vs. Plant and Equipment Depreciation
Renovation-related deductions fall under two main categories of depreciation:
- Capital Works Deductions: These apply to the structural elements of your property—such as walls, roofing, flooring, and built-in fixtures. You can claim 2.5% of the construction or renovation cost each year over 40 years, provided the building work commenced after specific ATO-determined dates.
- Plant and Equipment Depreciation: This applies to removable assets like appliances, blinds, air conditioners, and hot water systems. Each asset has a set effective life as defined by the ATO, and deductions are calculated based on this schedule.
- Differentiating Renovations, Repairs, and Maintenance
Understanding the differences between renovations, repairs, and maintenance is crucial when claiming deductions:
- Maintenance refers to regular upkeep tasks like servicing air conditioners or cleaning gutters. These costs are immediately deductible.
- Repairs involve fixing something that is broken, such as replacing a shattered window or fixing a leaking tap. These, too, can be claimed in the year they are incurred.
- Renovations or improvements upgrade or improve the property’s condition—like installing a new kitchen or bathroom. These must be claimed over time through capital works deductions.
Example: Replacing a faulty washer in a leaky tap is a repair and can be deducted immediately. Replacing the entire kitchen (including that tap), however, would be considered a renovation and must be depreciated over time.
How to Claim Capital Works Deductions
To claim depreciation and capital works deductions correctly, you must obtain a tax depreciation schedule from a qualified Quantity Surveyor. This report itemises your property’s eligible deductions, including structural renovations and depreciable assets.
If you’ve recently completed renovations, your existing schedule can be updated to reflect the new improvements. Even if renovations were completed in the past and you never claimed deductions, a Quantity Surveyor can backdate these claims, estimate the renovation costs, and help you recover eligible tax benefits.
Make sure to keep thorough records of all renovation expenses—receipts, contracts, and invoices—as this documentation will be essential for your claims and for any potential ATO reviews.
Renovations and Capital Gains Tax (CGT)
Renovations not only affect your annual tax deductions but can also reduce your Capital Gains Tax when you sell the property. The cost of renovations can be added to your property’s cost base, which is used to calculate the capital gain.
Example:
- Purchase price: $500,000
- Renovation costs: $50,000
- Sale price: $800,000
- Capital Gain = $800,000 – ($500,000 + $50,000) = $250,000
If you hadn’t included the renovation costs, your capital gain would have been $300,000—resulting in more CGT payable.
Key Takeaways
- Renovations can significantly improve your rental property’s value and income potential.
- Renovation expenses are not immediately deductible but are typically claimed through capital works deductions over time.
- Repairs and maintenance can be claimed immediately, unlike structural improvements.
- A Quantity Surveyor is essential for preparing or updating a depreciation schedule to claim deductions accurately.
- Renovation costs can also reduce your CGT when the property is sold if included in the cost base.
- Keeping detailed records of all renovation expenses is critical.
- Engaging a tax professional can help you navigate ATO regulations and maximise your tax savings.
Conclusion
Strategically renovating your investment property not only adds value and appeal but can also deliver significant tax benefits—if managed correctly. By understanding the difference between repairs, maintenance, and renovations, and claiming depreciation through capital works deductions, you can enhance your after-tax returns and build long-term wealth.
If you’ve completed or are planning renovations on your rental property, now is the time to ensure you’re maximising your tax position.
—————BOOK YOUR EXCLUSIVE 15 MINUTE ZOOM CONSULTATION————-
We offer a 15-minute no obligation consultation to existing property investors, first home buyers and small business owners who are looking at property investments, business and asset protection. To Book an Appointment simply click here and pick a time and date.
BOOK YOUR ZOOM APPOINTMENT HERE
How can we help?
If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au or arrange a time for a meeting so we can discuss your requirements in more detail.
General Advice Warning
The material on this page and on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this page and on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs.
Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this page and on this website, Camden Professionals, its officers, representatives, employees, and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
Recent Comments