How Does Depreciation Change When You Do Renovations? (Ep147)
The depreciation schedule is generally something that you get done once and then you use it over the years to claim the lowering in value of items in your property.
However, if you are going ahead and doing a renovation to your property – whether that be a major renovation like adding extensions or whether it be minor renovations like sprucing up a property – it is important to amend your depreciation schedule so you continue to maximise the depreciation that you can claim.
Today I talk with Brad from BMT Quantity Surveyors about how renovations affect depreciation schedules and what you need to do if you are going ahead and doing renovations.
This is part 8 in a 10 part series on depreciation.
Why Does Renovation Affect Depreciation?
When you do a renovation, you are adding more costs to the building effectively. You are putting a new kitchen in, adding another room to the house. You are spending money.
As the cost of depreciation relates to the cost of the property and it’s internal fixtures and fittings – the more things you add due to renovations the more costs are in the property so you can depreciation those.
Why Should You Call A Quantity Surveyor Before Renovating?
If you renovate or someone’s renovated then the deductions are going to be higher. One thing I’d love to say if you are a renovator or going to be a renovator, call the quantity surveyor first and the reason for that is when you renovate, you actually throwing some things away that potentially had some value left.
We call that scrapping because it’s easy to understand. You scrap some things.
There are things in that property that had depreciation applicability. They still had some value left. Rather than continuing to depreciate those things, if you throw them away or scrap them, there will be an instant deduction for whatever value is left.
Make sure you get it looked at before as it may give you significant deductions when those items get scrapped. So many people don’t do that before.
How To Get A Depreciation Schedule Done For Scrapping
Before you do renovations, you do a depreciation schedule. That’s all it is – because then we’ve had a look at everything and gone through the house. We put a value on those things that you are depreciating away each year and you decide to throw them away.
If you’ve done a depreciation schedule with a firm like BMT in years gone past and now its time to renovate, that depreciation schedule is itemised to the point where we can look at the depreciation schedule, what value is left in the dishwasher that we threw away and then talk to our accountant to potentially claim that.
The accountant will see those items pretty easily from the report. BMT can explain that easily to you if you can call back to have a discussion.
Do We Need To Get A New Depreciation Schedule Done After Completing Renovations?
Lets say we are done that and we are going to do our renovation, do we then need to get a new depreciation schedule done on the property as a whole?
It needs some adjustments for the new things put in there. It’s usually an adjustment for the existing report as opposed to the brand new one.
Your quantity surveyor will add the things in there that you’ve put in there and you get to claim it starting from when you put them in.
Now if you rip the house apart and start again. They may want to come back and have another look at it.
Rather than having to go visit the site, most quantity surveyors can actually work off the cost that the owner has provided to them provided it’s not major renovations.
Renovations can be a great way to generating more rental income but you need to budget for them in your cash flow estimated. The Advanced Property Calculator inside Get the free eBook allows you to account for renovations and maintenance and see how they effect your return on investment. Get the free eBook