Can you claim depreciation when buying a renovated property?
Many property investors buying regional properties or in the outer suburban rings of their capital cities tend to acquire properties that were constructed before July 1985 with the hope of renovating to increase its value.
Most property investors now know you cannot claim building depreciation for properties that are constructed before July 1985. But what if your property pre-1985 has been renovated, can you claim depreciation on the renovations?
The simple answer is, yes, as long as you are using a property for income-producing purposes, you are entitled to claim depreciation on renovations completed after July 1985 – regardless of who paid for them.
The law doesn't exclude those renovations just because they are situated in an old building. As long as the renovation commenced post 1985, you are entitled to depreciate them.
The good news is that even minor renovations can yield a significant amount of depreciation. To begin with, you can claim 40 years’ worth of deductions on renovation construction costs (called “capital works”) annually.
For example, say you purchased your investment in 1991. It’s now 2021 and kitchen is looking a bit dated. Because the ATO has determined that a kitchen should last 40 years (or until 2031), you still have 10 years’ worth of available capital works and plant and equipment deductions.
For a kitchen originally valued at $20,000, that’s a $5,000 residual value deduction when you remove it. And as long as the property is income producing both before and after the renovation, if you install a new kitchen, the 40year depreciation cycle begins again.
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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.