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Tax Deductible Renovations
As tax season approaches, it's good to make sure all of your ducks are in a row. There is definitely nothing wrong with saving some money on taxes by remodelling your house or investment property. However, it's essential to know what you can claim and when.
Renovation-related costs aren't fully deductible by the ATO (Australian Taxation Office) in Australia. So, if you're investing in a new kitchen, bathroom, or simply flooring to raise the market worth of your home, now is the time to see how you may reap the rewards of your efforts.
This article will look at some examples of renovations or home improvements you can and cannot claim taxes for.
Are Home Improvements Tax Deductible?
Depending on the type of remodelling you're doing, and whether or not it's considered a repair or an improvement, you can determine whether or not you can deduct the costs. Let's look at the comparison between repairs and improvements in more detail.
The ATO defines a repair as any modification that returns a home to its original state and/or market value. Unless you own rental properties or a home office, you cannot deduct repairs to your primary residence for tax purposes. Fixing a leaky faucet, patching a hole in the carpet, swapping out rusted hardware, or replacing a few shingles on the roof are just a few instances of house repairs.
Any change you make to your home that raises its monetary value is considered an improvement. The addition of a new driveway, roofing, siding, attic insulation, septic system, or built-in appliances are examples of upgrades. Tax deductions are available for most home improvements, but some are only available in the year the house is sold.
Suppose you improved or renovated your house in 2016 and then sold it in 2021. Any tax benefits you could be entitled to will appear on your 2021 tax return. To get the most bang for your money, even if you don't plan to sell your home in the following year, you should keep meticulous records of all your tax-deductible home improvements.
Also, consider consulting with a local tax accountant when in doubt about whether an upgrade or repair is tax-deductible.
Five Tax Deductible Home Improvements
Check out the following list of tax-deductible home renovations to see whether you've completed any repairs you can claim as a deduction or credit this year.
Renovations for Energy Efficiency
General information regarding tax deductions for renovations related to energy efficiency:
- Savings method: Credit
- Tax-deductible period: You can claim it within the same year.
Certain energy-efficient modifications can result in a credit or a decrease in taxes due on homeowners' 2020 tax returns, dollar for dollar. A 10% tax credit can be applied to the cost and the amount of energy-related property costs paid or accumulated during the taxable year for qualified energy-efficiency improvements.
The new tax law specifies that wind, geothermal, and fuel cell developments are only eligible for tax credits through the end of the 2017 tax year. After 2019, the solar credit will be lowered annually through 2021.
You may still receive a 30% credit for installing solar energy systems on new or existing residences. In addition to your principal dwelling, credit is also available for newly-built properties that have not yet been completed. Remember that most qualified energy efficiency improvements can be credited, but not subtracted, during the same calendar year.
A tax credit is available for the following energy-efficient home improvements:
- Putting solar panels on the roof
- Investing in solar water heater systems
- The use of small wind turbines
- The installation of Energy Star-compliant windows and doors on the outside of a building
Medical Care Improvements for the Home
General information regarding tax deductions for medical care improvements:
- Savings method: Deduction
- Tax-deductible period: Within the same calendar year
Tax benefits for medical care-related home modifications are difficult to come by. However, if you intend to make these renovations in your home, you may be eligible for the total amount of these deductions. If you, your spouse, or a dependent need medical equipment installed in your house, you can deduct the cost of such equipment from your taxes.
Because they don't increase the property's market worth, the following home renovations are totally tax-deductible:
- Creating access and entry and exit ramps
- Enlarging corridors and doors
- Modifying or lowering the kitchen cabinets
- Addition of lifts between floors
- Adding bathroom support bars
- Fire alarms and smoke detectors altered to suit the needs of the building
Enhancements to a Home Office
General information regarding tax deductions for enhancements to your home office:
- Savings method: Deduction
- Tax-deductible period: Within the same calendar year
When it comes to tax deductions for a home office, regular, exclusive use of the space and the fact that your home is your primary business location are two of the most critical factors. Some of the most prevalent changes to tax law have recently occurred in the area of home office renovations.
Employees who keep a separate workspace from their employer's offices no longer qualify for tax deductions. However, those who are self-employed or run their own businesses can still deduct the cost of remodelling their home office. Even if you don't qualify for this tax break, you can still take advantage of it by making repairs and improvements to the areas of your home that are used for your business.
Home office improvements can be depreciated over time, and you can deduct repairs in the year they are completed because they are considered essential to the upkeep of your business. You can get a tax deduction for the following office renovations:
- In-office repairs that can be done at your convenience
- In-office improvements that directly affect your work environment
- Other elements of the house that have been repaired (partially deductible)
- Other aspects of the home that have been improved (partially deductible)
Modernising Your Rental Home
General information regarding tax deductions for modernising your rental home:
- Savings method: Deduction
- Tax-deductible period: Within the same calendar year
The laws on repairs vs. renovations may get a little confusing for rental homes. For tax purposes, repairs are deducted since they are deemed essential to property upkeep. Rental property repairs, including home office renovations, can be deductible in the year they are performed.
Renovations to your rental home, such as a new kitchen, bathroom renovation, a laundry room expansion, or upgraded appliances, increase its value, but they also depreciate over time. A tax deduction is applicable for the following rental home improvements:
- Maintaining a safe and liveable environment for your renters
- Upgrades to the property include room expansions (deductible over time, with depreciation)
Improving Home to Increase Resale Value
General information regarding tax deductions for improving your home:
- Savings method: Deduction
- Tax-deductible period: In the year of purchase
The total value of your home increases when you make significant upgrades to it, known as "capital improvements." The cost of making resale-value upgrades to your property might be deducted from your taxable income if you sell your house, so keep account of all your expenses, including labour.
A tax deduction is applicable for resale-focused improvements to your home, such as:
- Adding a new room to your residence
- A basement is being finished
- The completion of a third floor
- Adding a new bathing area
- You installed a new furnace
- Adding a swimming pool
Repair, Maintenance, And Enhancement Claims
Property managers frequently mistake combining repairs, upkeep, and renovations when filing their yearly tax returns. It is critical to understand and distinguish between each deduction to maximize your tax refund.
Repair
Repairs, such as rebuilding a section of a damaged fence, are classified as construction work by the tax authorities.
Maintenance
Work done to prevent an asset from being damaged or deteriorated is known as maintenance. Taking care of a home's exterior, such as oiling a deck, is an example of routine maintenance. If you have to spend money on repairs or maintenance for your investment property, you can usually deduct those expenditures from your taxable income in the year you incur them.
The ATO states that the first repairs for damage that existed when you purchased the property are not deductible. When you sell the property, these costs are used to calculate your capital gain or loss.
Enhancement
The quality or value of an item is improved beyond its initial state when purchased. This is referred to as a capital improvement. As a result, this must be classed as either a capital expenditure deduction or plant and machinery depreciation.
A building's structure and objects considered permanently fixed to it, such as bricks, mortar, sinks, and basins, are all considered part of what is referred to as "capital works" for calculating tax deductions.
On the other hand, plant and equipment assets include things like carpets, blinds, and light fixtures that you can simply remove from the site. When remodeling, it's critical to know the distinction between repairs, maintenance, and capital improvement deductions.
An example of a renovation project would be to upgrade the bathroom in your rental home. Adding tiling to the bathroom would qualify as a capital improvement and allow for a deduction on your taxes. Over the course of 40 years, those who built homes after September 15, 1987, can receive capital works deductions at a rate of two and a half per cent.
Bathroom Renovation Is Tax-Deductible
Capital gains tax is generally exempt for those who have built or renovated their own home, which must be their primary residence. If the home is your main dwelling and you utilise any improvements as part of your home, they're free from capital gains tax if you sell it.
As an investment property owner, you can claim a lot more in tax deductions than you can as an owner/occupier. You should be aware that the Australian Taxation Office will treat any work you do to renovate or flip houses for profit as a business activity. In terms of taxation, this could significantly impact your situation.
Most of the depreciation claim is due to capital expenditures, which account for about 85% to 90% of the total. Walls, doors, windows, cabinets, retaining walls, toilets, sinks, and the roof is all included in this category of structural components.
Renovating Your Bathroom
Plant and equipment assets can be depreciated over the asset's useful life if you replace a light fixture in a bathroom. For purchases under $300, the expense is completely tax-deductible in the year it was made. As a repair, you are restoring a damaged asset when you fix a crack in the plaster.
You can claim a deduction for any expenditures you incur as soon as they are incurred. The 2017 legislation should also be considered by property investors who are nearing the completion of bathroom repairs and renovations. As of 7:30 p.m. on May 9, 2017, investors who purchased second-hand residential properties can no longer claim deductions for the decrease in value of previously used plant and equipment.
When renovating rental properties, all newly installed assets will be considered previously used if an investor resides in the property. As a result, the investor may lose out on tax advantages. Investors can claim depreciation on new plant and equipment assets, and any new or old qualified capital works deductions if a property is regarded to have been extensively modified by the former owner for selling purposes.
Considerations For Renovating Through Tax Claims
- Renovations must be completed within 12 months of purchase to be eligible for total tax depreciation.
- Depreciating items like white goods, carpets, and window coverings should be prioritised.
- Keep all invoices and don't claim your own personal labour expenses.
- Ensure that all depreciation items are claimed for their full lifespan.
- A 40-year depreciation period is available for an investment building based on the structure's actual or historical construction cost. The 40-year depreciation period only applies to new buildings constructed after 1985, but extensions and renovations to older buildings are also eligible. The new additions will cost 2.5 percent of the original construction cost.
- Older homes with new kitchens, bathrooms, carports, garages, patios, and barbeque areas built after 1985 are depreciable.
- Depreciation as a structural improvement is available for pools constructed after February 1992.
- Only once during the life of an investor's ownership of an investment property is a Tax Depreciation Schedule required.
- A qualified taxation depreciation expert can help you get the most out of your tax depreciation deductions.
Construct Or Remodel A Home On Your Own
Capital gains taxes are generally not applicable if you build or remodel your own home, which must be your primary residence. Capital gains tax doesn't apply if the residence is your primary residence, and you use any improvements as part of your home when selling it.
A swimming pool, for example, can be built on land adjacent to the home if the total area of the property is less than two hectares. You may be able to claim various deductions as a homeowner, including if you work from home, which is becoming more common. Work-related internet and utility costs are among the most common examples of these costs.
Home Projects To Boost Tax Deductions
When it comes to making home renovations on an investment property before the July 1 deadline, you should be able to claim tax deductions on them. You just have to make sure that they fall into one of the following categories:
- In addition to painting your home's interiors, you should paint the outside of your home at least every five years.
- Spruce up your garden, especially if your fencing is in poor condition.
- It's usually good to get new gutters installed, especially if the old ones can't withstand winter storms.
- Check any area of your plumbing that requires some attention, from a trickling faucet to major problems.
- Floating timber flooring is another cost-effective upgrade that can be applied to any home.
A trained builder can assist with a wide range of renovation tasks, from pergolas to converting a garage into a living area to major renovations. A handyman in your neighbourhood may be all you need for minor repairs and maintenance.
According to ATO guidelines, you should break up repairs and renovations if they're done simultaneously. Obtaining an itemised invoice from your renovator will help you calculate your claim.
Getting Help For Your Tax Claims
Taxes can be difficult to understand. Therefore, it is extremely important for those who own an investment property to figure out things like depreciation schedules. Qualified quantity surveyors can help you handle these numbers more precisely.
In addition to hiring a professional renovator or contractor to upgrade your home, consider using a tax consultant to guide you through the tax claims for the renovations. Based on your specific scenario, they can help you get the most out of the deductions you're entitled to.
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