Booming property values in areas such as Sydney is encouraging more property owners to upgrade their properties.
The latest building approvals figures for September 2015 show that Australians committed $679 million or nearly $170 million every week on home renovations.
This was not a once-off anomaly because over the entire September quarter 2015, building approvals for home renovations totalled a massive $2 billion nationally.
Australians' growing love affair with home renovations is further highlighted by the fact that over the past two financial years spending on home renovations has jumped by around $800 million to $7.3 billion.
In particular, booming property values in areas such as Sydney is encouraging more property owners to upgrade their properties.
For example, last financial year, building approvals for home renovations in Sydney topped $1.65 billion. Spending on home renovations was particularly high in the eastern suburbs of Sydney, with more than $330 million being committed to home renovations during this period.
Record low interest rates are also encouraging more Australians to renovate their homes, combined with the growing popularity of TV renovation shows such as The Block.
In particular, DEPPRO has found that during the last year there has been an upswing activity by investors who are taking advantage of low interest rates to purchase properties for renovation purposes.
Typically, these investors plan to renovate the properties with a view to either sell them in the short term at an enhanced profit or keep them long term and boost rental returns through these renovations.
While home renovations can be a great way for investors to make money through property investment, they still need to do their homework before undertaking any.
One trap is for property investors to overspend on renovations because they become emotionally attached to the property.
As a result, they risk overcapitalising the property, which is one of the most common mistakes in real estate.
The danger with home renovations is that the investors can spend thousands of dollars improving their home only to find that when they sell their property, they cannot recover the money they spent.
In addition, many property investors fail to claim their full tax benefits relating to home renovations.
Unfortunately, many investors throw out many items without understanding that they may claim tax benefits on these materials at 100 per cent of its written down value in the year of disposal.
A typical amount spent on a home renovation can range from $20,000 to $60,000 for a basic refurbishment. However, an investor can qualify for both plant and capital works allowance as a tax deduction and the residual write-off of the disposed item through tax depreciation benefits.
To qualify for these tax generous benefits, investors have to undertake a depreciation schedule for the property as near as to the date of purchase as possible.
Paul Bennion is the managing director of DEPPRO tax depreciation specialists.
DEPPRO Pty Ltd is Australia’s leading property depreciation company, specialising solely in the preparation of tax depreciation reports for residential, commercial, industrial and leisure investment properties.