I have recently purchased an investment property. I am having a think about how much money i can spend on the property in terms of repairs and improvements. I need to have a better understanding of what i am entitled to claim on tax in order to budget effectively. I have had a building inspection completed and have identified a few areas which are priority for me to attend to. Please note this property is a recent purchase and all of these problems were there from the previous owners.
Basically I would like to know if the items below i can claim as an:
a) instant tax deduction in the first year (repair),
b) a deduction off my capital works when i sell the property,
c) or something which i can claim over couple of years as depreciation.
If i can claim something on tax, could you please expand on this by telling me ‘how’ so i know what im in for. For example, in the case of a repair im looking for an answer along these lines – ‘you can claim all of this instantly during this financial year’, or in the case of something to be depreciated or claimed over a couple of years, please tell me something along the lines of – ‘since the item will cost approximately $800, you can claim $400 each year for the next two years.
The items are:
1) There is an asbestos shed in the backyard, part of the roof is falling down (about 20% – 30% of the roof is bowing), this has been described as a major defect/safety hazard by the building inspector as it could fall down at any time. I wish to have it destroyed and removed (at the cost of approximately $5000 by a specialist asbestos removal service). I am not replacing this with another shed, i am merely destroying the safety hazard.
2) The gutters and downpipes are rusting in parts, the building inspector said this will need to be replaced in the near future. cost will be around $1200-$1500.
3) There is a problem with the roof tiles and they need to be rebedded and repointed at the cost of approximately $1200 in the near future.
4) the entire fence outside is colourbond (in good condition) except for about 5 meters of it which is wooden and is rotting badly. I wish to replace this section with colourbond to bring it into line with the rest of the fence. Will cost around $800.
5) The carpet in the 3 bedrooms is in bad condition, its ripped, old and worn in many sections, i wish to have it removed and destroyed at the cost of around $800. Note that i will not be replacing it with new carpet, i will be destroying it and just leaving the polished wooden floor underneath. Also during this process can i claim the polishing of the wooden floor?
6) I wish to install inbuilt wardrobes in the bedrooms at the cost of $800, there are currently no wardrobes in there.
7) I wish to renovate the bathroom and kitchen (they are 50 years old and looking very worn and tatty) at the value of about $7,000 each room. I am assuming i will need a depreciation schedule for this? note that the building is 50 years old and attracts no building depreciation.
1) Asbestos Shed
ID 2004/720 states that the cost of removing an asbestos shed in the back yard of a rental property qualified for an immediate tax deduction. Any other type of shed and it would be considered capital expenditure as an improvement, initial repairs. But the removal of asbestos is claimable under the environmental protection concessions section 40-755 to 40-765 ITAA.
Your problem is PBR 69713 that states if it needed repairing then the action is not an environmental protection but a repair. As this is a repair that needed doing when you purchased the property then the cost can only increase your cost base for CGT purposes.
In short if it was in sound condition an outright immediate tax deduction but because it is not the cost can only reduce your capital gains on sale.
2) Repairing damage that was present when you purchased is an initial repair so can only be depreciated at 2.5% as special building write off, no quantity surveyor report required just use 2.5% of the cost to you, of the repair.
3) same as 2) above.
4) same as 2) above
5) You can immediately write off the remaining value of the carpet ie the second hand value of the carpet when you purchased it, which you are allowed to estimate yourself. Applying the traditional repair or improvement rules to the floor polishing I would say 2.5% as in point 2) above but here is an exception published by the ATO that you could use to argue that the polishing of the floor boards is an outright deduction. ID 2002/330
Though take care here as it is looking at carpets worn out during the time the property was owned so even if you get the polishing of the floor boards as a repair it may still be considered an initial repair so still only 2.5% a year.
My opinion is ID 2002/330 is wrong and 2.5% should apply anyway, just letting you know there is room to argue.
6) 2.5% of your costs every year for 40 years no quantity surveyor report needed
7) Most of it will be 2.5% of your cost over 40 years. You do not need a quantity surveyor report you are only entitled to use the actual amount you paid. You can increase your claim by separating out the costs of plant and equipment such as hot water systems, range hoods, dishwashers and stoves. These can be depreciated at a faster rate. Quantity surveyors will charge you about 6 or 700 dollars to do this and there is nothing in the law saying you are required to get their valuation of the plant and equipment so instead do it yourself. Ask the builder to supply you with a break down or you can get a valuation of these appliances by printing off some on line prices of using a catalogue. To work out what is plant and equipment which can be depreciated at a faster rate look at the column for division 40 depreciation in the list at the back of this ATO booklet.
It will also give you the years it can be depreciated over so you can work out how much you can claim each year. Short the expected life higher the rate of depreciation. That also explained in detail in the booklet
Anything above to which 2.5% depreciation applies can increase your cost base for CGT purposes by any of the costs you have still not yet been able to claim under depreciation