Case study: Renovation and depreciation
Renovations of older investment properties can often be funded by the depreciation tax deductions available to investors, BMT Tax Depreciation director Bradley Beer says.
"In many cases, renovations can be funded by the immediate 'write-off' of old items and the depreciation deductions from the new items," Beer says.
He provides the following case study to demonstrate how the renovation and depreciation processes work together.
Jim buys a three-bedroom townhouse that was built around 1950. In its pre-renovation condition, the house contained carpet, vinyl, blinds, an air conditioner, old stove, hot water service and light fittings.
Upon his accountant telling him about the potential depreciation deductions available in old, pre-renovated properties, Jim organised to have a scrapping report written before he started any work on the property.
A depreciation specialist inspected the site, taking note of all the items that could be 'written off' before they were thrown out. The following deductions were obtained:
- air-conditioning unit: $600
- blinds: $600
- carpet: $2500
- hot water service: $420
- light shades: $300
- stove: $350
- vinyl: $1500
Jim took the report to his accountant and claimed $6270 in depreciation deductions that year in his personal tax return.
Over the following 12 months, Jim completed his renovations, including an extension at the rear of the property. The depreciation specialist assessed the renovated property to achieve the maximum depreciation deductions.
The second depreciation report took into consideration all new additions (stainless steel oven, cooktop and rangehood, new carpet, air-conditioning unit, etc.) as well as calculating the construction write-off allowance now available on the extension.
The total depreciation claim on the scrapped assets and renovated property came to $16,000 in the first year alone.
