Home renovations and improvements are a necessary part of being a property owner if you want to prolong the condition and aesthetic appeal of your home. As we all know, every penny counts, so if you’re planning a home renovation, you may be wondering what you can claim back on your taxes.
When Can You Claim Tax Deductions on A Renovation?
Renovations on your primary residence aren’t tax-deductible, but you can claim money back if your property is used for investment purposes or the renovation is on a part of your home that you use for running a business.
The Australian Tax Office (ATO) sees these renovations as business expenses and will allow immediate tax deductions for repairs and maintenance, as well as capital improvements that depreciate over time.
Repairs and Maintenance Deductions
You can claim tax deductions if you are repairing existing damage or carrying out maintenance to restore your property to its original state. Repairs and maintenance are immediately deducted from your tax return in the year that the work is done.
The ATO says repairs and maintenance work could include:
- Repainting
- Repairing gutters
- Plumbing and electrical repairs and maintenance
- Fixing leaks
- Replacing broken windows, tiles, fences
- Repairing machinery or tools
Substantial improvements, such as complete remodels or major installs (a new ceiling, etc), can’t be claimed back. You also can’t claim if the repairs were carried out immediately after the property, machinery, or tools were purchased.
Capital Expenses
Major improvements and complete renovations will fall under ATO’s capital expenses if they add value or extend a property’s lifespan.
Capital expenses could include:
- Kitchen renovation
- Bathroom renovation
- Laundry room renovation
- Home extensions (including garages, patios, and pergolas)
- Installing a new ceiling
- Upgrading appliances
- Installing a new fence
- Driveways or retaining walls
- Removing or replacing walls
The cost of a capital works expenditure isn’t deducted straight away. Instead, it is claimed via capital works deduction at a rate of 2.5% of the construction costs a year, for a period up to 40 years (if construction commenced after 15 September 1987). If construction commenced between 21 August 1984 and 15 September 1987, the applicable rate is 4% a year for a period up to 25 years. Even older properties could qualify for capital works deduction if substantial renovations or other structural improvements have been made more recently, so it’s worth checking the construction date of any later works as well as the original build.
The construction work must be completed before it can be claimed as a capital works deduction.
Example Calculation of Capital Works Deduction
Here’s how capital works deduction is calculated and applied, using the example of a kitchen renovation in a rental property that costs $40,000 (including labour and materials).
Assuming the renovation was completed after 15 September 1987, it will qualify for the 2.5% rate over 40 years.
Annual deduction = $40,000 × 2.5% = $1,000 per year
This $1000 annual deduction can be claimed against the property’s gross rental income before tax is applied, which lowers the taxable amount on generated rental income.
This amount can be claimed each year from the date the renovation was completed, for up to 40 years or until the full $40,000 has been claimed, whichever comes first.
If the property was only used for rental purposes for part of the financial year, the deduction is pro-rated. For example, if the renovation was completed on 1 January and the property was rented out for the remaining 181 days of the financial year, the deduction will be reduced to the same proportion of time.
Effect on Capital Gains Tax
If you sell the property after renovating it, you may be able to reduce your capital gains tax (CGT).
CGT applies to any profits that are made when selling a property that has increased in value from the time that it was owned. By adding the price of the renovation to the property’s cost base (the amount of money you’ve put into it during your ownership), you’ll get a higher CGT reduction.
However, capital works deductions claimed over the years of ownership must be subtracted from the cost base when calculating the capital gain. This essentially means that investors cannot double dip by claiming the same renovation cost twice (once for capital works deduction and once for addition to the cost base when calculating CGT on sale).
What Home Improvements Can I Claim Back on Taxes?
Kitchen Renovations
Big kitchen renovations can be claimed back as a capital expense if it is within an investment property or used primarily for business purposes. You may also be able to get some tax deducted immediately through repair and maintenance work.
Bathroom Renovations
The rule for bathroom renovations is the same as for kitchens. Repairs and maintenance for leaky taps, broken tiles, or plumbing maintenance can be claimed back immediately, while major installations and remodelling will fall under capital expenses and depreciate over time.
Home Extensions
A home extension is a larger project which typically involves building a whole new room, so it’s unlikely that you will be able to get any immediate tax deductions through repairs and maintenance. Extensions do come under capital works because they add value to a property, so you could claim a deduction at a rate of 2.5% or 4% per year for up to 40 years.
Home Office Renovations
Home offices, including in primary residences, can be eligible for tax deductions provided it is used for a home-based business to generate income. Renovations could include installing shelving, repainting, or recarpeting, and tax deductions will be generated based on the percentage of your home you use for business purposes.
How to Maximise Tax Deductions?
To get what you are entitled to from your tax returns, you should keep all documents relating to your renovation, including receipts, invoices, and contracts, so that you can prove how much a renovation cost and when the work was completed when you are making a claim.
The renovation specialists at Venaso Selections can provide advice on your renovations and how you can maximise your tax returns while still being compliant.
We’ll guide you through the process of applying for tax deductions and provide strategies to boost your returns by identifying all deduction opportunities, including those that can be deducted immediately.
Contact us today to discuss your renovation by calling (08) 6144 0551 or emailing sales@venaso.com.au. If you prefer to speak in person, visit our Perth showroom any day of the week.