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Should I claim depreciation allowances before or after I renovate?

"I have bought an investment property, in April 2017 which I plan to renovate in about six months’ time. It was leased when I bought it, and the lease runs out on October, so I plan to renovate it when my tenant moves out. I’m not sure whether I should get a depreciation schedule done now so I can make a claim on my tax return this year, or wait until I’ve completed the renovation(and will therefore have a much better depreciation schedule)? It seems like I will miss out on tax deductions this year, but I don’t want to spend the money on getting two depreciation reports. Which would be the best course of action?"

There are a few different things to consider here, starting with your initial acquisition. As the property is income-producing, then you are able to claim allowances, as you point out. To get the benefits available to you, you should prepare an initial schedule that details all the deductible items as at the time of settlement.

Depreciation deductions for plant and equipment under Division 40 and for structural items under Division 43, will only apply if the building is young enough. You can then claim these allowances from settlement up until the point when either the property is no longer earning income or you decide to commence the renovation.

Having this initial schedule will provide you with the base document for your deductions going forward and also the base document to alter after you have completed the renovations.

Depending on the extent of the renovations you are planning, there will be items on the original schedule that will remain post-renovation, items that will be demolished and disposed of, and completely new items that you can depreciate going forward.

An important point for the new depreciation schedule post-renovation is that you must capture all the costs of the renovation in as much detail as you can get from either the builder or the individual trades companies that carry out the work for you, as this will make it a lot easier to create the new schedule.

You should also document other costs, such as design fees, permits and so on, and either add these into the new depreciation schedule or get advice from your accountant as to how these costs may be taken up in your tax return.

“The fees associated with doing two schedules would still be well spent and the deductions generated would pay these fees many times over”

There may also be an opportunity to write off 100% of the balance of the costs associated with items in your original depreciation schedule that were demolished during the renovation, and you should discuss this possibility with your accountant.

In terms of value for money and doing two schedules, in our experience the fees associated with doing two schedules would still be well spent and the deductions generated would pay for these fees. 

If you have any questions please contact our NBTax Depreciation team on 1300 730 382.