Our Turn to be the Bad Guy - If you renovate, then sell, probably non-deductible!
Scenario 1
You have owned a rental for 10 years.
The tenants give their notice to move out. You decide this would be a great opportunity to sell.
To maximise the sale value, you paint the house outside, you renovate the bathroom and do some other repairs for $20,000.
The property is sold.
Unfortunately the $20,000 of costs are not deductible as repairs. They are a cost of selling and non deductible.
The rules do not look at who caused the damage, or why the repairs were needed.
Scenario 2
You have owned a rental for 5 years.
The tenants give their notice and move out. You decide this would be a great opportunity to renovate and then re-tenant.
You spend $15,000 on painting and other repairs [See point (a)]
Then, as part of your re-tenanting process, your property manager suggests you get a meth test, just in case. You have already appointed the new property manager and already started to advertise the property.
Meth test = positive. All attempts to rent stop.
$9,000 is spent to decontaminate [See point (b)]
You decide you have had enough and sell the rental.
(a) Is the $15,000 deductible? Obviously it would need to meet standard repair vs asset tests, but as the property was being renovated to rent out, and there is clear evidence that the property would be re-tenanted, then the $15,000 would be deductible.
(b) Is the $9,000 deductible? Unfortunately not. The $9,000 is a cost of selling and not associated with receiving rent.
Scenario 3
You have owned a rental for 6 months.
The tenants give their notice and move out. You decide to renovate and then re-tenant.
You spend $17,000 on painting and other repairs.
You then rent the property out for another 2 months, before changing your mind and selling.
Is the $17,000 deductible?
Yes, as long as standard repair versus assets tests are met, this is associated to the rental income, and the property was rented before and after the renovations.
Note – Any gains would be subject to the 2 year Bright-line test!
I hope you have found these examples useful.
Kind regards
Ross Barnett
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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