Renovating - Cash in on the residual value allowance

If you are planning on renovating your investment property, before you call in the builder, architect or interior designer first call in your quantity surveyor. Property investors are missing out on thousands of dollars in legitimate tax deductions because they are not claiming the residual value write off on items before they renovate.

Residual value write off explained
As long as your property was built after 1985, the residual value allowance relates to capital works deductions on property you are about to renovate.

It is specific to capital works items, which are depreciated at a rate of 2.5% per annum based on the original cost over 40 years. Items such as bricks, windows, kitchen cupboards, tiling, shower screens, balustrades, light fixtures and taps fall into this category.

If you are planning to renovate your property, before you demolish any capital works items where the original cost is unknown get your quantity surveyor in to assess the residual value.

Case Study Example
John has bought an investment property built in 1988. The original kitchen and bathroom are in desperate need of a makeover to meet market expectations.

Without an independent estimate by a qualified quantity surveyor, John's tax deduction in regards to this renovation would be zero. Here are the potential deductions he's missing out on.

Value left when demolished (20 years @ 2.5%)
Kitchen Cupboards: $8000
Kitchen Wall Tiles: $1250
Kitchen plumbing: $850
Shower screen: $750
Vanity: $650
Bathroom Tiling: $2,200
Bathroom Ceiling: $1350
IMMEDIATE DEDUCTION: $15,580

Some key facts about the case study

• When john finishes his new kitchen and bathroom - he can start claiming those items at 2.5% again.
  
• John demolished these items voluntarily and was still able to claim the amounts in full
  
• The property was built after 1985 - that's the year the ATO allowed investors to claim the building allowance (bricks etc)
  

Tyron Hyde is one of Australia's leading experts in property depreciation and director of Washington Brown Quantity Surveyors.
http://www.washingtonbrown.com.au