Advice for Depreciation Schedule

[Dos]

Hi all,

As I have mentioned before, we are in the process of our first tax return with IP's. I have read lots about depreciation schedules and Quantity Surveyors through searches but would like some specific advice on my situation.

We have one property purchased in 2001 which was built in 1989. Should I get a QS out to do a schedule and what will be depreciated? Second IP was purchased late 2003 and had been "re-located" to this spot and built in 1989. Again, will it be worth getting a QS out and what will be depreciated?

Also, this will probably sound silly, but I have picked up on some things here and there that indicate there is a relationship between claiming depreciation at tax time and when selling a property. Not keen to sell anytime soon but would be good to know!!

Any help appreciated as always!

Dos

[geoffw]

I would get the report done of both properties. there's a good chance it will pay for itself in the first year- if not, then in subsequent years.

I'm not sure about how the CGT reduction is calculated. However, Capital Gains Tax is payable on half the amount of CG (if you have held it for more than 12 months). So if you claim $500 in depreciation now, you will get a deduction (at top rate) of almost $250. If that were to be added back at sale time, it would reduce the cost base by $250, so you would pay tax of about $125.

You’ve also got the benefit in today’s dollars.

However, if you are in a very low tax bracket, you would not get a lot of benefit from claiming the depreciation now- and it’s likely that a capital gain in the future would put you into the top bracket.

[Mark_B]

We have one property purchased in 2001 which was built in 1989. Should I get a QS out to do a schedule and what will be depreciated

Yes, get a QS to do a schedule.

If the IP was built in 1989 then the construction costs - and any stuctural improvements made since then - can be claimed at the rate of 2.5% p.a. for 40 years (to the year 2029 or thereabouts).


The rules for structural depreciation are:

Built / structural improvements before 18 July 1985 - no stuctural depreciation

Built 18 July 1985 - 15 September 1987 - structural depreciation @ 4.0% p.a. for 25 years from the build date

Built / structural improvements post 16 September 1987 - structural depreciation @ 2.5% p.a. for 40 years from the build date.


Second IP was purchased late 2003 and had been "re-located" to this spot and built in 1989. Again, will it be worth getting a QS out and what will be depreciated?

It was relocated in 1989?

Or it was built in 1989, then relocated?

If it was built in 1989 (regardless of whether it has since been relocated), then - as I understand it - you can claim the 2.5% p.a. for 40 years.

If the property was, say, an older property and then relocated to its current location in 1989 then while the building itself may not be depreciable, the stumpings / stilts that it sits on probably are (I had this discussion with a QS recently).

What will be depreciated?

Irrespective of the ability to claim Division 43 "capital works" deductions, all IPs are eligible for Division 40 "depreciating assets" deductions (such as fixtures and fittings).


Also, this will probably sound silly, but I have picked up on some things here and there that indicate there is a relationship between claiming depreciation at tax time and when selling a property. Not keen to sell anytime soon but would be good to know!!

When you sell an IP any depreciation that you have claimed (say $10,000) gets taken off the purchase price (or added onto the sales price) - either way you are liable for CGT on an extra $10,000 of (hopefully) profit.

But think of it this way - by claiming depreciation you save tax dollars today - in todays dollars! When you sell at some undefined point in the future the extra CGT you are liable for is in future dollars - which is not worth as much as today's $ owing to:

(a) inflation and

(b) the ability to use that extra $ to make more $ (the opportunity cost of avoiding additional CGT liabilities)


A real life depreciation shedule example

Contract price of IP - $129k. Build date - about 1980. Other than a new kitchen in about 1990 no structural improvements. Newish carpets.

For the grand outlay of $495 I got a depreciation schedule (recognised by the ATO) which allows me to claim a total of $16,841 in depreciation over the life of the schedule, including in the first year - $1,754 (well and truly paid for itself)


MB

[Dos]

geoffw and Pitt St,

Superb advice and knowledge as usual!! I had a picture in mind and you have both put on the finishing touches on it, very clear now!! Thanks very much!

The second IP has had a lot of strange circumstances around it. One is when the house was built and when it was moved there. The building inspection report was inconclusive to a degree, saying that the house was moved to that location but not sure on when it was built yet the REA says it was either built there 4 years ago or moved there 4 years ago. A matter for me to clear up quick smart. Should my solicitor have this info if he did the searches etc??

Dos

[julia]

Dos,

The advice you have received is great. I would just like to add one technicality. For CGT purposes section 43 special building write off that is claimable reduces the cost base of the property if it was purchased after 13th May, 1997. Note the legislation says claimable not claimed so not claiming the depreciation if you are in a low tax bracket will not save you anything in the future.

julia@bantacs.com.au

[geoffw]

Dos,

The advice you have received is great. I would just like to add one technicality. For CGT purposes section 43 special building write off that is claimable reduces the cost base of the property if it was purchased after 13th May, 1997. Note the legislation says claimable not claimed so not claiming the depreciation if you are in a low tax bracket will not save you anything in the future.

julia@bantacs.com.auInteresting point Julia- thanks.

There have been questions as to whether the the plant depreciation, and/or the contents depreciation, count towards reducing the cost base. I'm not clear.