How Does Depreciation Change When You Do Renovations? (Ep147)

The depreciation schedule is generally something that you get done once and then you use it over the years to.


The depreciation schedule is generally something
that you get done once and then you use it over the years to claim the looting value
of items in your property. However, if you are going ahead and doing a renovation to
your property, whether that be a major renovation like adding extensions or whether it be minor
renovations like sprucing up a property, it is important to amend your depreciation schedule
so you continue to maximize the depreciation that you can claim. Today I have talked with
Brad from BMT Quantity Surveyors about how renovations affect the depreciation schedules
and what you need to do and you are going ahead and doing a depreciation. This is part
8 in a 10 part series on depreciation. You can get access to all the episodes links or
you can download an easy to read PDF of all the episodes by going to onproperty.com.au/depreciation.
Now over to the interview with Brad and again I will be back at the end to summarize.
Ryan With renovations we were saying that you can’t
claim on an older property that the construction is a certain period old. If it’s too old,
you can’t claim the building. When people do renovations that might change. What do
you mean by that and how does depreciation change, when you do renovations.
Brad Now look, I am probably going to think about
two parts of that question. Lets talk about the renovation. When you do a renovation,
you are changing the things that are there. You are adding more costs to the building
effectively. You are putting a new kitchen in, adding another room to the house. You
spend some money, therefore the cost of depreciation relates to the cost and there is more things
there and then you and that costs something so you depreciate those. So then you put in
new stuff in for depreciation. Ryan
You still have to pay for it. Brad
You still have to yes. You get to climb that with depreciation over time. If you renovate
or someone’s renovated then the deductions going to be higher. One thing I’d love to
say if you are a renovator or going to be a renovator, call the quantity surveyor first
and the reason for that is when you renovate, you actually throwing some things away that
potentially had some value left. We call that scrapping because it’s easy to understand.
You scrap some things. Before you do the renovation, you’ve brought this investment property
and you are renting it out. You decide you want to do a renovation. There are things
in that property that had depreciation applicability. You do it for those things. Then in the second
or third year, I am going to do this renovation. You throw some of those things away. They
still had some value left. Rather than continuing to depreciate those things, if you throw them
away or scrap them, there will be an instant deduction for whatever value is left. Make
sure you get it looked at before so there is things that you throw away could have made
significant deductions are getting scrapped and claimed when they get scrapped. So many
people don’t do that before. Ryan
How would a renovator go about doing that and getting that depreciation schedule done
on things they are throwing away? Brad
Its simple. Before you do renovations, you do a depreciation schedule. That’s all it
is because then we’ve had a look at everything and gone through the house. We put a value
on those things that you are depreciating away each year and you decide to throw them
away. From that report you will be able to see what claim or you’ll be able to buy
some of the things that you’ve thrown away. Ryan
So you are saying if we had done a depreciation schedule with yourselves in years gone past
and now its time to renovate, that depreciation schedule is itemised to the point where we
can look at the depreciation schedule, what value is left in the dishwasher that we threw
away and then talk to our accountant to potentially claim that.
Brad That’s right. We will talk to you about
that if need be. The accountant will say that pretty easily from the report. We can explain
that easily to you if you call back to have a discussion. Definitely.
Ryan Lets say we are done that and we are going
to do our renovation, do we then need to get a new depreciation schedule done on the property
as a whole? Brad
Good question. It needs some adjustments for the new things put in there. It’s usually
an adjustment for the existing report as opposed to the brand new one. We add a few items and
add the things in there that you’ve put in there and they get to view it starting
from when you put them in. Now if you rip it apart and start again. We may want to come
back to the start and have another look at it. Generally, you can work off some of your
costs if you moderate your actions. Ryan
Rather than having to go visit the site, you can actually work off the cost that the owner
has provided to you; there renovation costs on certain items?
Brad Some of the times yes provided its not major
renovations. The quantity surveyor gets involved in relation to the cost. That’s why its
there about compliance about costs. If you’ve got all of the costs in the invoices, most
of the tax service wants us to use them and we do. Secondly, I don’t need to go and
look at the condition of the thing that you put a $1000 for.
Ryan And it’s brand new. So that is good to know
for renovators is that choosing who you go with, quantity surveyor, to start with to
make sure you get the reports that you need. Those are very itemized detailed reports.
Those will help you when it comes time to renovate both in scrapping. Throwing items
away, it can help you with that and help you with adjustments to your depreciation schedule
if the old schedule is extremely accurate. Brad
It’s really just making sure you do your projected costs on your property. If afterwards
you rip it apart and do renovations, we have another look at adjustments.
Ryan When doing renovations its important that
you amend your depreciation schedule in order to continue to maximize the amount of money
you can claim and continue to claim correctly. There also is the opportunity for what we
call a scrapping schedule which is not the official term for it but its a term we use
to simply explain what happens when you write off the existing value of items that are off
your depreciation schedule. So before you go ahead and do your renovations, make sure
you have an itemized depreciation schedule in place so that the items you are throwing
away, you can still claim the remaining value of those items with your accountant. You also
need to make sure you are updating your depreciation schedule with the changes you have made and
keep all of your receipts where possible so you know the exact value of something again
so you can maximize your depreciation. For links to all of our episodes about depreciation
head over to onproperty.com.au/depreciation. When renovating, its important to understand
how much money you are putting in, how much money you are borrowing from the bank and
how that affects cash flow and also how that affects your cash on cash return. In the advance
property calculator, I added a section where you can add different cash amounts or add
different loan amounts so you can easily assess whether or not a renovation is going to generate
you the return that you need in order to make it worthwhile. To check out the advanced property
calculator, head over to onproperty.com.au/apc and download it today! Until tomorrow, remember
that your long-term success is only achieved one day at a time.

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