When a renovators delight is not such a delight.
Property investors are generally looking for ways to maximize their tax-deductions to improve their tax refund, which means cash back in their pocket.
Here's a common scenario. An investor acquires an older style property with a view to doing some improvements to increase the rent. So the investor puts some money in, doing up the bathroom and the kitchen and giving it a coat of paint. Let's say a spend of $20,000.
The investor may think this expenditure qualifies as repairs and maintenance but it is in fact capital works. Which means rather being written off in full in that tax year, only 2.5% ($500) can be claimed over the next 40 years.
But there is also another issue, which is the age of the original building and available deductions. If the property was 20 years old then the build cost for depreciation purposes is based on the estimated build cost 20 years ago. Also 2.5% percent can only be claimed for the remaining 20 years not 40.
Compare two properties both $400,000 one new and one 20 years old. The new property's build cost is $200,000. Therefore 2.5% ($5,000) can be claimed as a deduction for the next 40 years. The build cost of the 20 year old property would be $50,000. Therefore only $1,250 per year can be claimed over the next 20 years.
So what does this mean? For a person earning $80,000 a year the newer property would put $1,182 more a year back in their pocket on the building depreciation alone. Doesn't sound like a lot but on a $400,000 home loan that extra saving could cut over 3 years off the life of the loan.
Contact us to dicsuss how investing the right way can improve cashflow and help pay off your home.
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