Renovating an investment property is different to renovating your own home. Whether the renovation is big or small, you will be taking a head over heart approach and doing what will help you improve your return on investment.
Claiming depreciation deductions on the assets installed during a renovation usually isn’t front of mind. However, choosing assets for your renovation that hold higher depreciation deductions can boost your cash flow sooner.
What is depreciation?
Depreciation is the natural wear and tear of a property and assets over time.
Only owners of income-producing property can claim depreciation as a tax deduction each financial year. Tax Depreciation consistently sees these deductions save residential investors tens of thousands.
A tax depreciation schedule completed by a specialist quantity surveyor is the only way an investor can claim depreciation. The schedule lasts up to forty years and is 100 per cent tax deductible.
Depreciation and new assets
If you’re thinking about giving your investment property a facelift before advertising to prospective tenants, you may have a few things in mind. Maybe you want to give the interior a fresh lick of paint, change the outdated flooring throughout or do a full bathroom renovation. Whatever you’re planning to do, depreciation on the assets you choose should be a key consideration.
For example, floor coverings such as carpet, floating timber and vinyl are called plant and equipment assets. Each asset has an effective life and is depreciated using the diminishing value or prime cost method.
Case study: claiming more sooner following renovation
Casey owns an investment property, and she has decided to renovate it now and sell it in two years’ time.
She wants to ensure that she claims the most depreciation possible in the two years following the renovation. Her two flooring options are vinyl flooring or floating timber floorboards.
Before deciding what flooring to use she consulted a specialist quantity surveyor, to find out what’s the best option from a depreciation perspective. The specialist advised that given her short-term investment strategy, vinyl may be the better option.
This is because vinyl has a diminishing value rate of 20 per cent, while floating timber floorboard diminishing value rate of 13.33 per cent. This means Casey can claim more sooner from vinyl flooring. Furthermore, vinyl generally requires less maintenance than timber floorboards do which is ideal for an investment property.