As a property investor, you might find yourself implementing repairs and renovation work onto a property to ensure that you are maximising its value on the market. However, though both can be claimed on your tax return, it’s of paramount importance that you know how to claim them. Getting it wrong can be both costly, and unlawful.
A rental property improvement is a renovation where something is improved beyond its original state and must be claimed with depreciation. This means that you are claiming a deduction for the decline in the value over the effective life of the renovation. For example, a rental property improvement that could be claimable by a property investor could include a bathroom getting retiled.
Maintenance and repairs however can be claimed differently, with all records kept containing accurate information on that work. This will assist in working out the depreciation of assets of the property.
A depreciation schedule is a report that outlines all available tax depreciation deductions for a residential investment property or commercial building. These depreciations can be claimed in your tax return each financial year and could help you to save thousands.
Investors who renovate and lodge their tax returns prior to ensuring that they have updated their tax depreciation schedule correctly could get caught out in making a mistake between the two types of work. Those who fail to properly record rental property improvements in a tax depreciation schedule risk making inaccurate claims and inviting the scrutiny of the Australian Taxation Office (ATO).
Your tax obligations and entitlements when renovating your property may change depending on how you go about it. Depending on whether you are a personal property investor, engaged in the profit-making activity of property renovations or carrying on a business involved in renovating properties, you will have to abide by certain requirements outside of maintaining the depreciation schedule.
Personal Property Investor
As a personal property investor engaging in renovations to a property:
- The net gain or loss gained from the renovation is treated as a capital gain or capital loss.
- Capital gains tax concessions such as the CGT discount and the main residence exemption may reduce your capital gain.
- You will not be required to register for GST as you are not conducting an enterprise.
Profit-Making Activity of Property Renovations
Consider yourself a ‘flipper’ of properties? You will be required to:
- Report your net profit or loss from the renovation in your income tax return as a result of the profit-making activity.
- Have an Australian business number.
- May be required to register for GST if the renovations are substantial.
In The Business Of Renovating Properties
If you are carrying out the business of renovating or flipping properties:
- They are regarded as trading stock (even if you live in one for a short period of time.
- The costs associated with buying and renovating them form part of the cost of your trading stock until they are sold.
- You calculate the business’s annual profit or loss in the same way as any business with trading stock
- You’re entitled to an Australian business number (ABN)
- You may be required to register for GST if the renovations are substantial.
In this instance, CGT does not apply to assets held as trading stock. Similarly, the CGT concessions (such as the CGT discount, small business concessions and main residence exemption) will not be applicable to the income gained from the sale of the properties.
If you are concerned about any of the topics discussed above, or want to know more about claiming property improvements on your tax return, you can come and speak with us for further information and advice.