Australia’s renovations industry appears to be profiting from weaker economic conditions and tighter lending standards, with alterations and additions to residential buildings hitting a historic high recently.
Australian Bureau of Statistics Building Activity data showed a 6.6 percent increase in alterations and additions in 2018; this trend has continued into 2019 on the back of a softer market, indicating homeowners and investors seeking to improve capital values and increase rental income have been renovating their properties, rather than purchasing new properties.
It’s expected this boom will continue, as Master Builders Australia has forecast homeowners and investors will spend $8.8 billion annually on renovations over the next five years.
Renovations can significantly increase rental income. According to Australia’s leading property analysts, CoreLogic, gross rental yields are currently around 4 percent; and in some scenarios, renovators can achieve returns of up to 13% on their renovation investment.
However, before committing to a renovation project, it is important to be aware of the following:
Scrapping can increase deductions when renovating
As part of any renovation, old assets will be discarded, and new assets will be installed. When removing structures or assets from an investment property, existing assets may have a residual depreciable value. A process known as scrapping should be applied to ensure un-deducted entitlements are claimed.
Asset selection when renovating affects depreciation deductions
Choosing which assets to install can also make a difference to what can be claimed once a renovation has been completed. Items that serve similar purposes, such as flooring, depreciate at different rates. Carpet installation with a $2,000 cost will result in $500 in depreciation deductions in the first full year compared with floating floorboards and tiles of the same cost, which result in $267 and $50 in deductions respectively.
Avoid overcapitalising when renovating
Investors should stick to a budget when selecting items as it’s easy to overcapitalise. This is particularly relevant in today’s property market, where according to CoreLogic dwelling values fell by 7.4 per cent from their peak in October 2017 to the end of March 2019.
As many capital cities have experienced price declines, investors need to be wary of recouping the dollars spent during a renovation, particularly if they are planning the work to help sell their property at a higher value or raise the cost of rent to increase rental income. Sticking to a budget is crucial.
Seek advice prior to commencing renovation
Seek professional advice on potential deductions available including whether depreciation legislation changes passed in November 2017 have any impact on your personal situation.
If you’re living in a residential property whilst completing a renovation, work completed can impact future deductions should you rent the property later. Newly installed plant and equipment will be considered previously used if items are added to a residential property while living there. CoreLogic data shows one in four people lived in their property before renting it out in FY 2018/19.