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What Home Improvements are Tax-Deductible?

A home renovation can be a lucrative tax-deductible investment if you are aware of your tax entitlements.

You can claim thousands of dollars after a renovation, all you need to know is what you can claim, and when.

Renovations are expensive; it only makes sense that you should take full advantage of the tax deductions available to you.

Generally, if you build or renovate your home, which must also be your primary place of residence, then you are exempt from any Capital Gains Tax (CGT).

According to the Australian Taxation Office (ATO):

‘If the dwelling is your main residence and you use any improvements as part of your home, they’re exempt from capital gains tax if you sell it. This includes improvements on land adjacent to the dwelling (such as installing a swimming pool) if the total area, including that on which the home stands, is two hectares or less.’

Understanding the Difference Between Repairs and Renovations

Repairs and renovations have different tax rules.

Repairs involve maintaining what is already present in the home – for instance, repainting the house. Renovations refer to any improvements in the home, not just major construction jobs.

Repairs are expenses deducted from the homeowner’s present year’s income.

Renovations are a capital expense and may depreciate over time.

But the actual construction from a renovation is under a separate division of the tax act. The owner can claim deductions at a rate of 2.5 per cent a year over 40 years from the date of the property’s completion.

The Tax Man and Home Improvement

The ATO allows homeowners to claim capital works deductions on any residential building whose construction began after the 15th of September 1987.

Capital works deductions constitute 85-90 per cent of the total depreciation claim. This includes all the structural and fixed items of the home.

Often, property owners think that they are ineligible for capital works deductions because their properties pre-date 1987. But usually, this is not the case.

Most of the properties built before 1987 have undergone some renovations, making them eligible.

The ATO also provides for homeowners to claim capital works deductions for structures added by a previous owner, provided their completion falls within the qualifying dates.

Renovations and Capital Gains Tax

Capital Gains Tax (CGT) refers to the taxable income in a financial year from the sale of an asset like a home.

The Australian Taxation Office states that:

‘If you acquired a dwelling before 20th September 1985 (when CGT came into effect) and made major capital improvements after that date, part of any capital gain you make when a CGT event happens to the dwelling could be taxable.’

However, different rules apply to investment properties.

If you renovate for profit, as in house flipping, the ATO will consider this a business activity, and that will affect your tax status.

The good news is that you can claim expenses related to the investment property, including:

  • Management and maintenance costs
  • Travel expenses incurred managing your property
  • Repairs to your investment property
  • Interest on your bank loans and borrowing expenses

However, you cannot claim deductions from major renovations, such as a kitchen remodel, in the financial year you incur them.

Major renovations are classified under capital improvements.

Deductions for depreciation and expenses incurred from capital improvements are spread out over several years.

You can consult the ATO guide to depreciating assets to learn more.

Alternatively, you can seek the help of a professional tax agent who will walk you through your deductions. These may include:

  • The cost of building permits
  • Internal alterations like removing a wall
  • Extensions like a pergola or garage
  • Structural improvements like a retaining wall
  • Architect and surveyor fees
  • Gardening and lawn mowing costs
  • Deductions for Homes Used Partly for Profit

For homeowners who work from home, there are deductions you can claim.

But, these deductions are subject to whether:

  • You have a dedicated work area – a room that serves primarily as a home office
  • You don’t have a dedicated work area – you don’t have a home office but do some work at home
  • Your home is your primary place of business – you run your business from home
Deductions you may be able to claimYou do have a work areaYou don’t have a work area
Cost of using a room’s utilities such as gas and electricityYesYes
Work-related phone costsYesYes
Depreciation of office plant and equipment such as desks, chairs, and computersYesYes
Depreciation of curtains, carpets, and light fittingsNoNO
Occupancy expenses such as rent mortgage interest and insuranceNoNO

Depreciation as a Tax-Deductible

Many homeowners do not understand that many of the items disposed of during a renovation have residual value.

For example, if you dispose of a 20-year-old kitchen valued at $10,000, you can still claim the 20 years of depreciation that remains.

Home renovations usually range between $20,000 and $50,000. Homeowners can claim both capital works allowance and residual write-offs on the disposed of items to make the most of their tax entitlements.

When applied correctly, property tax depreciation could save a homeowner a few thousand dollars in tax returns.

Tips to Maximise Deductions When Renovating

  • Spend money on high depreciation rate goods such as white goods, carpets, and window coverings.
  • New bathrooms, kitchens, garages, patios, and carports built after 1985 in older properties are depreciable.
  • Renovate at least 12 months after the purchase of a property to ensure full tax depreciation entitlements. Any sooner and the ATO declares that they have no value.
  • Based on the actual or historical cost of construction, a property built after 1985 is eligible for 40-year depreciation.
  • Extensions and alterations to older buildings are also eligible for 40-year depreciation.
  • You need a tax depreciation schedule only once during the ownership of an investment property.
  • Swimming pools constructed after February 1992 qualify for depreciation as structural improvements.
  • Keep all invoices and don’t claim personal labour costs.
  • Ensure you claim the full lifespan of all depreciable items.
  • Engage an expert taxation depreciation specialist to maximise depreciation entitlements.

Many property owners fail to claim their full tax entitlements, especially around depreciation benefits. This is mainly because there is such a wide range of items to claim.

Some of the legal yet often overlooked deductions include:

  • Children’s cubby houses
  • Free-standing spas
  • Garden gnomes
  • Pumps attached to spa baths
  • Water tanks
  • Built-in coffee machines
  • Car parking and recreational facilities
  • Kitchens and bathrooms

Property tax can be complicated. Especially if you own an investment property and have to work out things like depreciation schedules.

You should consider hiring a professional quantity surveyor to work out these figures.

You would also benefit from consulting a tax accountant.

A tax accountant will ensure that you comply with the latest tax legislation.

Partnering with the relevant professionals will ensure that you maximise your deductible claims and also save time and money.

Visit a reliable platform like Service Seeking Australia to get connected to a taxation expert and secure your tax entitlements today.