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Capital Works Deductions are ways of recouping some of the expenses incurred during certain types of construction done at rental income properties. These expenses are claimed back over a long period, extending over 25 or 40 yearly tax returns. Capital works deductions are subject to certain conditions. Baxton Property Management, starts examining these in some detail in this and later articles in its series about tax and rental properties.
Capital Works are large and relatively expensive construction projects. Included are adding a building to the property, carrying out extensions like an extra room, making alterations such as removing an internal wall, or doing other structural additions such as building a gazebo, or paving the driveway.
The deductions are normally spread over a period of 25 or 40 years. As in all tax situations, the amount claimed over the extended period cannot end up higher than the total construction expenses at the time the work was done. You will end up at receiving the full allowed cost, but it will be in very small increments each year.
You can’t start claiming deductions until the construction is complete. Nor can you claim deductions for any period when the building was not available to generate a rental income. This means if it was completed and ready for rental at some point during the first year you want to claim, you will only be able to claim a proportional amount based on how much of the time it was available. The same would apply if at any stage you stopped using it to generate a rental income, either permanently, or for a certain period of time.
The percentage of deduction allowable in any given rental income year is given in tables available in the 2017 Rental Property Owner’s Guide, and is dependant, amongst other things, on the year of construction, and whether it was built specifically for the purpose of renting.
If your rental property is destroyed or severely damaged by fire, or some other disaster, you are allowed to claim for the portion of your construction expenses you have not yet claimed. The claim must be in the same income year the damage occurred. However, you must deduct from this claim any amount you received from insurance, and any money you happened to get from the salvage of the property.
If the property is not completely destroyed, but can be fixed and put to use again as a rental income property, you are not allowed to claim any deductions for the period that the property was not available for rent.
If you use the expense of construction as the base for calculating capital works deductions, you are not allowed to use those same construction expenses as the base for other deductions, such as the decline in value of depreciating assets.
Rental property is a vital source of extra income, but unfortunately the management of that property presents many and varied headaches. Why not let Baxton Property Management, one of the leading property managers in the Australia, take care of all the headaches associated with managing your own property. For more information visit us at the Baxton website.
Written and syndicated by
– Baxton Media.
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The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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