Renovating a home potentially means putting tens of thousands of dollars towards improving the property – so, knowing what to claim at tax time could put money back in your pocket.
Renovating a home potentially means putting tens of thousands of dollars towards improving the property – so, knowing what to claim at tax time could put money back in your pocket. If you’re planning a renovation, it pays to know what you can potentially claim at tax time.
Ultimately, your ability to claim tax benefits for renovating comes down to whether the property is your own home or an investment or rental property.
Here’s what you need to consider, including capital gains, tax deductions and other exemptions.
It’s important to remember that if you ‘flip’ a property; renovate a rental or investment property that you haven’t lived in, or renovate a property that is used at least partly to operate a business, the sale will be subject to capital gains tax.
That means you’ll be paying tax on any financial gain you make on the sale of the property.
However, when it comes time to sell, any renovation costs are subtracted before capital gains is calculated.
For example, as a basic guide, if you bought the property for $1 million and spent $50,000 renovating it before selling it for $1.1 million, you’ve made a $50,000 profit, and that $50,000 would be subject to capital gains tax.
Lyndall Condon from Mt Eliza Tax and Accounting says if a property is your main residence, any money you make on the property when it comes time to sell will effectively be a tax-free benefit to you.
“Because it’s your own home and your principle residence, if it qualifies as a principle residence,” Condon says.
“The tax benefit there is you’re not paying capital gains tax on the increase that you’ve generated by renovating.” Your tax claim may depend on whether you’re renovating your own home or an investment property.
Some of the most common tax benefits associated with renovating investment or rental properties come in the form of capital works deductions.
These are tax deductions that you can claim each year on the construction costs of renovations or permanent structural improvements to the property.
These include extensions, kitchen renovations, bathroom makeovers, sealing your driveway and even expenses like architect fees and the cost of obtaining building permits.
“The building works are deductible at 2.5% per annum for 40 years of the life of that building,” Condon says.
Importantly in the renovation game, various fixtures and fittings are depreciable at a better rate than the 2.5% you can claim for capital works.
The ATO has a very extensive list of which items come under which banner, and how long you can depreciate them for, so it pays to check carefully.
For example, most people would consider a hot water service to be a permanent part of a building’s construction, but for taxation purposes, it comes under fixtures and fittings and can be claimed at a higher rate – though not for 40 years like capital works.
“Say you’ve done the kitchen and you put in a dishwasher and a new stove. All of those things are depreciable at certain rates and the tax office prescribes what those rates are. And they’re at a higher rate than the 2.5%,” Condon says.
Originally published on realestate.com.au as “What are the tax benefits of renovating?”.
Things you should know:
This information if of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to you particular circumstances before acting.