What Are The Tax Implications For Professional Property Investor DIY Renovators?

Renovating a property often brings with it a sense of excitement. This is because renovation promises a new beginning. However, this so-called new beginning can have serious ramifications on your official obligations and entitlements.

In fact, overhauling a house or piece of land has different implications for personal investors, those engaged in the profit-making activity of renovations, and individuals carrying on a business of renovating properties. This simple guide will help take the tax-induced stress out of renovation.

Why do people renovate?

Home makeovers are a real trending hobby at the moment. However, not every renovator will be putting in the hard yards just for the fun of it. At the end of the day, when done properly, a home renovation can command lots of money.

While a fresh coat of paint or revamped bathroom may garner more net profit, these tasks have implications on government levies and your own entitlements from the government. As discussed below, different types of renovators will need to follow different practices.

Personal property investor

This term refers to an individual whose net gain or loss from the works will be treated as a capital gain or capital loss. A capital gain or loss is, in essence, the proceeds from the sale of the property, minus the purchase price and other associated costs with buying and selling.

It’s also worth noting that any capital gains tax concessions — also referred to as CGT — such as the CGT discount and the main residence exemption may stand to reduce the overall capital gain.

For the purpose of GST in Australia, personal investors are not conducting an enterprise and are therefore not required to register for GST. However, if you are registered in another business capacity, you do not pay GST on any sale proceeds or claim GST credits for related purchases.

The profit-making activity of property renovations

In the modern age, the real estate term ‘flipping’ has become more and more prevalent. With the advent of real estate and construction shows, more everyday people than ever before are trying their hand at renovations.

While the idea of flipping a house is a fun idea, it does come with tariff implications. In fact, it does involve a lot more than just obvious tasks like repainting walls, rebuilding old decks, and completely revamping a kitchen.

Anyone carrying out the profit-making activity of property renovations must report net profit or loss from the makeover in your income tax return. You may also be required to register for GST if the renovations are substantial.

The business of renovating properties

When it comes to official obligations and entitlements, there are quite a few rules, exemptions, and entitlements for those whose business centers around refurbishing or restoring homes and land.

Firstly, the premises is regarded as trading stock, even if you were to live in one for a short period of time. Secondly, the costs associated with buying and restoring them form part of the cost of the trading stock until the time at which they are sold.

Thirdly, you must calculate the business’s annual profit or loss in the same way as any business with trading stock would. Finally, substantial changes may require you to register for GST.

However, rules state that CGT doesn’t apply to assets held as trading stock. Additionally, any CGT concessions like the CGT discount, small business concessions, or main residence exemptions, will not apply to any income from the sale of the properties.

Remove the stress from renovations

Whether you’re investing, flipping, or conducting the day-to-day activities of your business, refurbishing premises should be fun. Watching the transformation take place before your very eyes should provide a level of utter satisfaction.

However, this process can sometimes be overshadowed by the stress of working out what tariffs you may be subjected to or exempted from altogether. Instead of worrying, conduct some research and make sure of your obligations and you’ll be back to enjoying the magic of renovation before you know it.