It’s true that a dated property can be less appealing to prospective tenants. Then again, if a tenant views a home that is in excellent repair, the age factor can be overlooked.
Before you spend up big on a renovation, read on to get an understanding of the cash flow benefits of claiming repairs or maintenance versus renovation costs (also known as capital improvement).
On the go? Here’s 30 seconds of key take outs:
- As your investment property ages its appeal to prospective tenants, or buyers, can deteriorate too.As the years go on, you’ll face the decision of whether you need to renovate, or simply maintain and repair your property.
- To make the right financial decision, you need to understand how tax deductions are treated for repair and maintenance, versus renovation or capital improvement. Remember, tax breaks mean more cash flow but you need to know when a tax deduction applies and over what time.
- There are benefits all around in investing money to refresh your property. From tax breaks, to attracting or keeping good tenants and minimising your vacancy rate, to a higher market value if you’re thinking of selling – right through to a better property valuation so you can keep on building your investments to reach your goals.
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If you’ve been following our blog articles and the wealth (pun intended!) of information available on the Capital Properties website, you’ll have a good understanding of how property investment works to put cash back in your pocket with knowledge and good planning in place.
While fixing your property investment will mean paying money out, it is important to understand that some of these expenses will be claimable in the financial year that you’ve had to cough up the money; and some expenses will be claimable over a number of years.
From a taxation perspective, maintenance and ongoing repairs can be claimed against your taxable income in the financial year that you had to wear the expense in.
Renovation costs – also known as capital improvements in Australian Taxation Office (ATO) terms – are treated differently. So, it is important you understand the difference.
The tax treatment of maintenance and repairs
The ATO defines repairs of an investment property as:
“…work to make good or remedy defects in, damage to or deterioration of the property”.
And maintenance as:
“…work to prevent deterioration or fix existing deterioration”.
The expense of any repair on a rental property can be claimed as an immediate 100% taxable income deduction in the year the expense is incurred.
To find out more, please head straight to the source at ATO > Residential rental properties
The tax treatment of renovations / capital improvements
Renovations or capital improvements to your investment property can be defined as improving the property’s condition, or enhancing the property to increase its overall value.
The ATO states:
“You cannot claim a deduction for the total cost of improvements to your rental property in the year you incur them. Capital improvements (such as remodelling a bathroom or adding a pergola) should be claimed as capital works deductions”.
To understand this more clearly the ATO provides a worked example. Here is the link – ATO > Residential rental properties > Claiming capital works deductions.
When does renovation of your property investment make good financial sense?
If you’re planning to sell or to gain better rental appeal – and optimum rental income, a practical, ‘fit for purpose’ renovation may be a good financial move.
When you make the decision to sell you’ll want to sell it for the highest price ¾ naturally. In the latter case, improving your property to attract a good tenant, you’ll also be looking to make a good first impression so you can take the lead on other similar properties in a competitive property market.
How does a renovation help you reach your goals?
When a prospective buyer checks out your property they tend to look at the reasons not to buy – and the less work they evaluate that needs to be done, the least their path of resistance. Most buyer objections will be relatively low-cost to fix.
You may also be looking to renovate and spruce up your investment property, if you’re wanting to get a better valuation – perhaps so you can satisfy your lender as you take the steps to grow your property investment portfolio. While it is important to have done your property investment research well in the first place, a cosmetic makeover over and above good property investment criteria could improve the valuation.
The question you’ll need to do your homework on, is where to spend the least amount of money to get the biggest amount of return.
Our tips on where to invest your renovation dollars
Here are some common improvements that will lift the appeal of your property to prospective tenants, prospective buyers, or property valuers:
- Fill settlement cracks
- Fix neglected gardens
- Update colour schemes and overall style
- Fix any faulty windows and doors
- Replace or spruce up floor coverings. For example polishing floorboards, or putting down new carpets.
- Upgrade window treatments.
If you’re planning to sell your investment property, invest your renovation dollars in the following:
- Bathrooms and kitchen
- Street appeal
- Outdoor areas
- A fresh coat of paint
- Replace light fittings
- Add an outdoor deck.
Increasing your rental return by investing your renovation dollars in something as basic as a fresh lick of paint, could attract the tenant you’re looking for. A cost-effective renovation will increase your rental return by decreasing the likelihood of your property sitting vacant.
The decision to sell or renovate can be difficult when you don’t have all the available information to make an informed appraisal.
Consider getting an independent property valuation as a starting point. Then, crunch and compare the following figures:
- Your sales price in the current market with your property in its current condition
- Projected renovation sales price less your renovation budget.
From here, you’ll start getting a sense of the most logical path for the best return.
Wishing you some wise, well informed decision making!
Get some experts around you to help you on your way: Pinnacle Program Support