Is it time to renovate your investment property?

Thinking about the types of new fittings and fixtures before installing them may generate you thousands of dollars in depreciation deductions. Make sure you do everything to maximise the cash flow potential of your next renovation project.

Many investors purchase properties that require improvement. They usually do this with the sole purpose of renovating to create equity and generate extra rent.

Once you have decided to renovate your investment property, it is important to ensure you obtain the best long term value from the money you are outlaying. Renovations can be expensive, so it makes financial sense to obtain the maximum depreciation benefit where possible. When it comes to deciding which new item to install in a property, some consideration should be applied to the depreciation potential of the new item.

Maximising depreciation on new items

Which new floor covering should you install to increase your depreciation potential – carpet, floating timber floorboards or tiles? The depreciation available on these items differs due to their varying effective lives.

If you spend $2000 on floor coverings, for example:

Item Effective Life Depreciation 1st Year

Carpet 10 years $400 Maximum

Floating Timber Floorboards 15 years $267

Tiles 40 years $50

Considering ornamental light fittings or down lights?

If you spend $2000 on lighting, for example:

Item Effective Life Depreciation 1st Year

Ornamental Light Fittings 5 years $800 Maximum

Down Lights 40 years $50

Deciding between an air conditioning unit and ducted air conditioning?

If you spend $5000 on cooling, for example:

Item Effective Life Depreciation 1st Year

Air Conditioner – Split System 10 years $1000 Maximum

Ducted Air Conditioning Unit 15 years $667

(Figures based on Diminishing Value method using current legislation)

As shown in the above examples, installing assets for their depreciation potential is certainly worthwhile. Depending on the size of the property and the extent of the renovations, the deductions obtained from the new items may improve your cash flow each financial year by thousands of dollars. In many cases, renovations can be funded by the immediate ‘write off’ of old items and the depreciation deductions from the new items.

Article Provided by BMT & ASSOC Pty Ltd.

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You Guide to Capital Gains & Depreciation Schedule Examples

Is it time to renovate your investment property?

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