• Renovating properties

    If you're renovating one or more properties you need to work out if you are:

    Personal property investor

    If you're considered a personal property investor, your net gain or loss from the renovation (proceeds from the sale of the property less the purchase and other costs associated with buying, renovating and selling it) is treated as a capital gain or capital loss respectively.

    CGT concessions such as the CGT discount and the main residence exemption may reduce your capital gain.

    You're not conducting an enterprise of property renovation for GST purposes and are not required to register for GST, but if you're registered in some other business capacity you don’t pay GST on the proceeds from the sale of the property or claim GST credits for related purchases.

    The following example illustrates the characteristics of personal property investing.

    Example: Personal investor

    Doug is a sales representative. He obtains an investment loan and purchases a property that he intends to rent out. He would not consider selling the property unless the price appreciated markedly. The property requires renovation to attract desirable tenants. Doug renovates the property after work and on weekends. Over the period of the renovation, the real estate market booms and Doug decides to sell the property.

    Doug would not be considered to be in the business of property renovation because:

    • his intention when he bought the property was to gain rental income rather than make a profit from buying, renovating and selling it
    • Doug didn't rely on the income to meet regular expenses because he has income from his job
    • his renovation activities were not carried on in a business-like manner, and
    • Doug did not buy the property with a view to selling it at a profit, and did not carry out a one-off profit-making activity.

    So, Doug is regarded as a personal investor.

    However, if Doug, because of his success with this renovation (either in his own right or with another or others) was to then undertake another renovation similar to the first with a view to achieving the same profit levels, he will be regarded as being in the business of property renovation.

    End of example

    Profit-making activity of property renovations

    If you're carrying out a profit-making activity of property renovations, you report in your income tax return your net profit or loss from the renovation (proceeds from the sale of the property less the purchase and other costs associated with buying, holding, renovating and selling it).

    You're entitled to an Australian business number (ABN) and you may be required to register for GST if the renovations are substantial.

    The following example illustrates the characteristics of a profit-making activity of property renovations.

    Example: Renovation as a profit-making activity

    Fred and Sally are married with two children. They renovated their home, substantially increasing its value. After watching many of the home improvement shows and seeing how other people have bought, renovated and sold properties for a significant profit, they decide to investigate the purchase of another property to renovate and make a profit.

    They consider many properties, costing out the renovations, the costs of buying and selling and timeframes to complete the renovations. Their research shows that they could also make a significant profit.

    Fred and Sally sell their current home and purchase a new property, which they move into while completing the renovations. They plan out the renovation in stages, including the costs and any contractors needed to complete the work. The renovation runs to schedule and, when completed, they list the property for sale and it sells for a profit.

    Because the property renovation activities were planned, organised and carried on in a business-like manner, the purpose of buying the property was to renovate it and make a profit, and the renovations were carried on in a similar manner to other property renovation businesses, Fred and Sally have entered into a one-off profit-making activity.

    End of example

    Business of renovating properties

    If you're carrying on a business of renovating properties, the purchased properties are regarded as trading stock (even if you live in one for a short period) and the costs associated with buying and renovating them form part of the cost of your trading stock until they're sold.

    You calculate your business's annual profit or loss in the same way as any business with trading stock.

    CGT doesn't apply to assets held as trading stock, and CGT concessions such as the CGT discount, small business concessions and main residence exemption don't apply to any income from the sale of the properties.

    You're entitled to an Australian business number (ABN) and you may be required to register for GST if the renovations are substantial.

    The following example illustrates the characteristics of a business of renovating properties.

    Example: Renovation business

    Tony is a carpenter. After reading the Investors Club News, he decides to purchase a property. He thoroughly researches the real estate market, attends investment seminars and records the information he has found.

    The property Tony purchases is in a good location but he pays a reduced price because it needs extensive renovation. Using his knowledge and contacts within the building industry, Tony quickly completes the renovations.

    He then sells the property and makes a generous profit.

    Using the proceeds from the sale of the first property, Tony purchases two more houses that require renovation.

    Tony sets up an office in one of the rooms in his house. He has a computer and access to the internet so he can monitor the property market. Tony’s objective is to identify properties that will increase in value over a short time once he has improved them. He leaves his job so he can spend more time on his research and renovations.

    Tony’s activities show all the factors that would be expected from a person carrying on a business. His property renovating operation demonstrates a profit-making intention; there is repetition and regularity to his activities. Tony’s activities are organised in a business-like manner.

    Therefore, Tony is regarded as being in the business of property renovation.

    End of example

    See also:

    Last modified: 13 May 2015QC 23644