We have an investment property that needs some tidying up to maximise the rent – things such as replacing the carpets, renovating the kitchen and bathroom, painting and a carport. Should we get a depreciation schedule before and after the renovations?
There is a significant benefit to be gained from what is known as ‘scrapping’, but all too often investors think of this after they have already thrown everything out, and this is too late.
First of all, your property has to be technically in the middle of being rented. So, if it’s never been rented and you carry out these minor renovations before you make it available to rent, then you will not be able to make claims. The property must be ‘income-producing’ in order to make claims. So the best time is either while the tenant is in there, or in between tenancies.
If you do not know the value of the items which you will be removing from the property, start out by having a depreciation schedule prepared. You are allowed to estimate the value of plant and equipment yourself (but not construction values), but it’s easier to have the schedule prepared, as this provides your construction values too. Once you have had this done, go ahead and carry out the makeover. Then, have the quantity surveyor come back to prepare an updated schedule. It’s probably helpful if you can keep a list of anything you threw out to assist them.
You can then go ahead and ‘scrap’ any items which had a value before you disposed of them. This means that their full, remaining value as at the time you threw them out carries an immediate deduction of 100% of the value for you, in that year! For example, if you dispose of $5,000 worth of old items, you can claim an immediate tax deduction for the entire amount! For those on the 40% tax bracket, this is a tax break of $2,000, which shouldn’t be sneezed at!
Source: Margaret Lomas Feb 22, 2013