Home renovation's overlooked tax deductions for investors

Thursday, Jan 24, 2013

Many investment property owners may be missing out on valuable property depreciation entitlements, simply by not being up-to-speed on what is and is not depreciable. Experts say that the examples of items that could qualify for tax deductions may surprise many taxpayers, such as garden gnomes or kids' cubby houses for example.

But before you go out and splash cash on an upmarket Dopey or Sneezy, remember that conditions usually apply, and the ability to access the depreciation is limited to investors. But according to Paul Bennion, managing director of specialist tax depreciation firm Deppro, rental property investors can depreciate hundreds of household items for tax purposes, including dishwashers, dryers and even built-in coffee machines.

"Many investors underestimate the number of items that can be depreciated for tax purposes," Bennion said. "The comprehensive list even includes garden gnomes and cubby houses, and if you own an apartment, common areas such as car parking and recreational facilities may also be eligible."

Other eligible but often overlooked items include:

  • pumps attached to spa baths
  • free-standing spas, and
  • water tanks.

Depreciation and amortisation allow investors to deduct a portion of the original cost of equipment and capital works on an investment property every financial year over the item's "effective life" — which is the time over which the ATO or the legislation deems the depreciable asset will lose its value. Basically, the building and its assets are getting older and wearing out, so the ATO allows investors to claim part of their cost each year as a deduction. Contact our office on (08) 8384 4400 for guidance or advice on effective life tables.

Other tax depreciation tips from Bennion include:

  • renovate at least 12 months after buying an investment property to ensure a full depreciation entitlement
  • spend on assets that have a higher rate of depreciation, such as white goods, carpets and window coverings
  • keep all invoices and do not claim personal labour costs
  • ensure the full effective life span of all depreciable items is claimed
  • an investment building is eligible for a 40 year depreciation based on actual or historical construction cost. This applies to buildings built after 1985, however extensions and alterations to older buildings are also eligible for separate 40 year depreciation
  • new kitchens, bathrooms, carports, garages, patios and barbecue areas built after September 1985 in older properties are depreciable
  • swimming pools built after February 1992 are eligible for depreciation as structural improvements
  • a tax depreciation schedule is only required once during the life of an investor's ownership of an investment property.

There is also the option to use the "residual value" of depreciable assets that are scrapped and replaced. A 20-year-old kitchen for example, with therefore 20 years still left on its effective life, can provide a deduction of 100% of its leftover value in the financial year in which it is scrapped. However isolating such a value may be an issue, so it is best to contact our office on (08) 8384 4400 and possibly using the services of a quantity surveyor before acting.