29 Apr Living in a rental while renovating is not a good idea – Brad Beer
If you plan to renovate a rental property, why not move in while you are doing it? Makes sense right? Not so according to Brad Beer. He says the financial downsides far out way the financial upsides.
Kevin: Well, it does actually seem like a good idea, doesn’t it? If you’re going to renovate a property, a property that you’re going to rent out after you buy it, why not move in? You’ve got to live somewhere, don’t you? Well, maybe it’s not such a smart idea. Here’s why. Brad Beer from BMT Tax Depreciation joins me. G’day, Brad. How are you doing?
Brad: Hi Kevin. Glad to be here as always.
Kevin: Thank you, my friend. Not a good idea, hey? To move in if it’s a rented … If you’ve got to rent it out, that is, and before you do the renovations.
Brad: Well there’s a lot of things to consider when you do this, and yes you do need somewhere to live and do that. But I guess sometimes the effect of doing that if you’re an investor and you’re going to be an investor in this property, does make a bit of a change to the amount of deductions you can claim. Because with the federal budget changes that we had a couple of years ago nearly now, if you actually live in and use some of these things that you put in there, your stoves or your plant equipment items, they actually become affected by this budget change and you don’t get to claim any deductions against them. And it can make, if you’re doing a big renovation, substantial amount of difference to the future cash flow. So it might save you a little bit then, but could cost you over the period of time afterwards.
Kevin: Have you got a feel for how many people could be affected by this? They don’t realise it until after it happens, Brad?
Brad: Well, whether they’re renovating or even if they just bought it and live in it first and then move out later, it’s the same thing. One thing they didn’t grandfather very well I think when they made those changes, there’s all these people that buy their property, maybe they’re a first time buyer, they live in it for the 6 to 12 months or a little while, and then they move out. Any of these people that lived in their property at any time are actually affected by this budget change. It was about a bit over 20% when we crunched the numbers that actually live in it first around that time. But the thing is that anybody who ever looks at maybe moving into one of their investment properties just for six months, or the other one is holiday rentals. That’s another one. If you actually use your holiday rental for more than occasional use, then you become affected by this budget change, and suddenly from using your holiday home a few times then when you rent it out again, suddenly you can’t claim deductions on your plant equipment anymore.
Kevin: So how many times would you have to rent it out? Sorry. Go and stay in a holiday accommodation before you’d lose that benefit?
Brad: So they haven’t actually … The wording is still just occasional use. The best information we’ve got at the moment is probably more than a month a year is more than occasional use. I guess, maybe that … I don’t know why they’ve said … Why we seem to have come up with that in talking to people from the tax office, but maybe it’s because you get a months holiday every year?
Kevin: I was going to say, does it ever really have to make sense anyway, Brad? If you’re talking about the taxation department.
Brad: The taxation department still at the moment says occasional use. So just being wary that if you’ve got a flash beach house that has lots of nice new plant equipment in there, and then you go and stay there for two months, then suddenly all your plant equipment and your flash stove becomes worth nothing for the purpose of depreciation when you rent that house out again. So just always things to consider. And this live in one, it’s a regular thing for people to live in their property, renovate it at the time, and then rent it out later because for some reason you seem to want to live through renovations yourself rather than somebody else. I don’t know why you do that. But it’s about saving some money, having somewhere to live, and being able to renovate I guess after work and night and weekends, etc. Which I’ve done before as well. And look, then suddenly all the plant equipment you put in there becomes worth nothing for the purpose of future depreciation deductions, and it might not be worth the amount of money that you save.
Kevin: Same would be the case I guess for brand new properties. If you buy it with the intent of leasing it out later then maybe live in it for a little while, you’d lose all those benefits, wouldn’t you?
Brad: Absolutely. If you buy a new property under the current rules as an investment property, you get full deductions on your plant equipment. If you live in it first and then move out of it, or even if you move into it later, then it becomes a second hand property for the purpose of these tax deductions and it could cost you thousands of dollars in deduction.
Kevin: In terms of … Because you’re always a good barometer for what’s happening with the market and the number of depreciation schedules you’re doing. What are you seeing with people who are buying brand new units? Is that increasing?
Brad: Well, our numbers have increased. From the 17 and 18 year, we did … About 31% of the depreciation schedules we did were on a brand new property. 2 years prior, 26.5 or 26.4% of them were actually on a brand new property. So we’ve seen a slight increase in the number of new properties being bought by investors, or that we’ve done a depreciation schedule on. We’re not the whole market. We do large numbers of them, but it is a little bit of a trend with those numbers that have come out in the last couple of years.
Kevin: I guess the bottom line here is that if you’re looking to buy a property that you intend to rent out, make sure that you discuss it first with basically your group of advisors who should include someone like BMT Tax Depreciation, Brad.
Brad: Yeah. Look, absolutely. We come up with and do estimates of what deductions might be available on properties, and then we can go, “Well, what if you live in it first and take the plant equipment away? What would those numbers look like in difference? So we we can come up with a close number and they’ve just got to crunch those numbers and see what’s going to work in the long term for you. Absolutely.
Kevin: Because it is very beneficial. I think I read somewhere recently you were saying that it’s just … The average is just over $8,000 in deductions that an investor can benefit from.
Brad: 17, 18 years. A bit over $8,000. And obviously being in that financial year, some of those people have been affected by this federal budget. I think the year before, the average was just under $10,000. So the average has dropped a little bit since our federal budget change, obviously. But I mean, there’s still plenty of … $8,000 is still great.
Kevin: That’s right.
Brad: We want to get whatever obviously we can out of that. And that’s based on over 60,000 depreciation schedules. So it’s not just based on a few. There’s a fair number that have been done there.
Kevin: Always makes sense not to leave money on the table. Brad Beer from BMT Tax Depreciation. Thanks very much for your time, Brad.
Brad: Thanks, Kevin. Always great to be here.