Author Topic: Improvements on a rental and tax implications  (Read 4736 times)

middo

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Improvements on a rental and tax implications
« on: March 19, 2019, 07:23:10 PM »
I'm hoping someone with a bit of tax knowledge can help me out here.  I will obviously use a tax agent for the final returns on this, but am after some guidance if possible.

My wife owns a rental, and has always declared the income as her own.  We have moved into it this tax year (in September) and have started to do some maintenance and improvements.  We were thinking of selling it, but are now looking at renting it out again at a much higher rate than previously. 

The maintenance is significant, including restumping and a replacement kitchen and bathroom, and will probably cost around $60,000 in total.  The improvements, which include an extra en-suite bathroom, and two extra rooms that become possible due to the restumping, will also cost around $50,000.

My questions are around how these will be seen for taxation.  In the past, any minor maintenance has obviously been written off against the income.  But these costs will be significantly more than the income for this year.  Can these costs be brought forward as losses for next year?  Would they be seen as improvements that would reduce capital gains in the future?  How would they be split between these two? 

I know it is a complex question, but some initial ideas would really help with our understanding here.

Thanks in advance.

deborah

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Re: Improvements on a rental and tax implications
« Reply #1 on: March 20, 2019, 12:33:44 AM »
The tax office has just done a review of investment property, and found that almost 90% of people are putting in incorrect tax returns for their investment properties. They are consequently planning to crack down on this significantly over the next while. Getting professional advice would be very important.

Quote
The ATO's next focus would be on rental income and deductions, with auditors having now completed over 300 audits on rental property claims and found errors in almost nine out of 10 returns reviewed, he said.

"We're seeing incorrect interest claims for the entire investment loan where it has been refinanced for private purposes, incorrect classification of capital works as repairs and maintenance, and taxpayers not apportioning deductions for holiday homes when they are not genuinely available for rent," Mr Jordan said.
From https://www.abc.net.au/news/2019-03-14/ato-steps-up-crackdown-on-lawyers-post-panama-papers/10899518

Unless you are replacing like for like, I would expect that the kitchen and bathroom would count as improvements rather than maintenance. The restumping may be maintenance, but if it allows you to add extra rooms, it sounds like it may also be an improvement. One suggestion my accountant made when I was renting was to have separate bills for the maintenance and the improvement parts of any work - so the re-stumping that really is maintenance could have a separate bill any extra.

If you are living there, maintenance may not be able to be claimed anyway, because you are not renting it out at the time of the maintenance.

It's a long time since I looked at this, so don't take what I say as gospel!
« Last Edit: March 20, 2019, 12:45:48 AM by deborah »

marty998

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Re: Improvements on a rental and tax implications
« Reply #2 on: March 20, 2019, 01:30:53 AM »
Correct, if you are re-stumping at the time you are in the property, it definitely won't be immediately deductible. It may be added to the cost base for CGT purposes, along with any interest, council rates and water rates you pay while it is your PPOR (little known rule which I don't think they've gotten rid of yet)

Your accountant might have the opportunity to save 10's of thousands in tax for you here, just keep all your receipts and document everything.

middo

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Re: Improvements on a rental and tax implications
« Reply #3 on: March 20, 2019, 02:00:19 AM »
Thanks for the info. It wasn't quite what I thought, so that helps me to get a better handle on it all.  These "reno's" are being done by choice, so tax is a bit of an afterthought, but we will keep it all in mind, as well as all receipts.

Bloop Bloop

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Re: Improvements on a rental and tax implications
« Reply #4 on: June 08, 2019, 11:27:41 PM »
Correct, if you are re-stumping at the time you are in the property, it definitely won't be immediately deductible. It may be added to the cost base for CGT purposes, along with any interest, council rates and water rates you pay while it is your PPOR (little known rule which I don't think they've gotten rid of yet)

Your accountant might have the opportunity to save 10's of thousands in tax for you here, just keep all your receipts and document everything.

This is also my understanding. Like-for-like replacement, refurbishment and maintenance is an income expenditure and can be immediately deducted. Capital improvements which increase the value of your home are capital expenditure and only affect your CGT cost base, making it in effect useless for short-term purposes.

Of course, the line on what is a "maintenance/refurbishment" and what is a "capital improvement" is often blurry, particularly with established houses that need a lot of work, so it's up to you how you want to treat your tax claims and what spin you give to your agent when reporting your expenses. At least some of it should be deferred as a capital expense unless you want to risk an ATO investigation.

Bloop Bloop

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Re: Improvements on a rental and tax implications
« Reply #5 on: July 30, 2019, 10:18:21 PM »
For those who are still game to invest in RE in Australia, where are you putting your money?

I'm coming up towards another IP to buy. I'm looking at town houses. No body corp (unlike apartments). Does anyone have experience with rental return on these, compared with apartments (high) and freestanding houses (low)? I'm mainly interested in yield not capital appreciation.

marty998

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Re: Improvements on a rental and tax implications
« Reply #6 on: July 31, 2019, 03:09:35 PM »
Town houses do have a body corp? Albeit small.... just enough to cover building insurance and shared driveways and gardens etc. Terrace houses do not.

Yields in Sydney on townhouses and villas are worse than apartments.