The tax trick that property investors need to get their renovation deductions in order

He cautioned property investors to take care, as those who fail to properly record rental property improvements in a tax depreciation schedule risk making inaccurate claims and inviting the scrutiny of the Australian Taxation Office (ATO).

Mr Beer said investors who renovate and lodge their tax return before ensuring they’ve updated their tax depreciation schedule appropriately do so at their own peril.

According to him, the trick is knowing the difference between a property improvement and property maintenance or repair.

Getting this wrong can be both costly and unlawful, Mr Beer said.

“A rental property improvement is a renovation where something is improved beyond its original state. It must be claimed with depreciation,” he explained.

“An improvement is retiling a bathroom, while fixing cracked plaster is a repair and oiling a deck is maintenance,” he used as an example.

While he admits that improvements are often required “due to wear and tear or damage”, Mr Beer emphasised the importance of not mistaking them for repairs or maintenance in their tax depreciation schedule.

Many of Mr Beer’s concerns are shared by CPA senior manager of tax policy Elina Kasapidis.

Regardless of whether a property buyer is an owner-occupier or a landlord, Ms Kasapidis emphasised the importance of correct record-keeping when it comes to depreciation.

“Landlords may be entitled to claim depreciation for the declining value of assets such as stoves, carpets and hot-water systems,” Ms Kasapidis said

“However, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase,” she added. 

Mr Beer noted that many property investors are tempted to claim improvements as repairs as it allows them to claim the full amount rather than the depreciated value. 

“There’s no doubt that an instant claim is more appealing.”

“But it’s against taxation legislation, and such a choice will come under harsh ATO scrutiny,” he warned.

Mr Beer advocated for property investors to adopt a more long-term view.

“Depreciation can be claimed on some assets for up to 40 years. Therefore, the small effort of updating the schedule now pays off throughout the lifetime of the investment,” he said.

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