What investors should know before buying a fixer-upper home
Buying a fixer-upper home can be a profitable way for first-time property investors to get into the real estate market, ...
Improving confidence in the established housing market has seen a surge of investors buying older style homes for renovation purposes, and there are actually extra depreciation considerations.
Blogger: Paul Bennion, DEPPRO tax depreciation specialists
The latest ABS figures for building approvals show that during the last financial year (2012-2013), some $5.8 billion was committed to home renovations in Australia.
This means that every month, nearly $500 million nationally was being spent on home renovations.
DEPPRO recorded very strong activity by property investors purchasing established homes for home purposes during the second half of the last financial year as a result of falling interest rates.
In particular, we undertook an increasing number of tax depreciation schedules for home renovators in cites where rental yields are above 5% such as Sydney, Brisbane, , Darwin and Canberra. These property investors are capitalizing on falling interest rates which has made home renovations more affordable while at the same time they can substantially boost their rental returns even further through targeted home improvements.
Typically, investors are buying older properties and undertaking renovations to kitchens, bathrooms with a view to either quickly sell the property for profit or to make the property more attractive to tenants and boost the rental returns.
Unfortunately, many investors throw out many items without understanding that they may claim tax benefits on these materials at 100% of its written down value in the year of disposal.
A typical amount spent on a home renovation can range from $20,000 to $60,000 for a basic refurbishment. However, an investor can qualify for both plant and capital works allowance as a tax deduction and the residual write off of the disposed item through tax depreciation benefits.
However, to qualify for these tax benefits, the investors have to undertake a depreciation schedule for the property as near as to the date of purchase as possible.
The depreciation schedule will provide the Tax Office with a ‘physical snapshot’ of the property and the schedule will itemise all of the fixtures in the property that can be depreciated for tax purposes.
When the depreciation schedule is undertaken at the time of purchase, it means that the investor can still qualify for depreciation on many of the existing fixtures in the property providing the investor intends on keeping those existing fixtures/items and waits for a reasonable time to begin renovations. Many people do not realise that older properties still maintain substantial allowance in plant and equipment regardless of their age.For example, a property that is more than 50 years of age could still qualify for thousands of dollars each year in tax depreciation benefits for the owner.
Anyone who has purchased an older property for investment purposes should therefore carefully consider the significant taxation benefits that can be achieved before beginning any construction work.