Buying with a sitting tennant could be costly.

[Keen]

Just thought I'd bounce this off formites.

I read that when you buy an IP the taxman expects you investigate if the place was previously a rental so that depreciation can be calculated accordingly.

Now obviously this is not easy for the taxman to monitor and even nigh impossible for the investor to find out. So my understanding is the tax department puts the ball in your court and expects that if to your knowledge the place has been previously rented you will claim accordingly.

But I fear that by buying a place with a sitting tennant, it is blatantly obvious to all and sundry that the place was tennanted previously and you are in no other position but to claim a reduced amount of deductions (ie the previous 2 years were claimed by the previous owner you can start claiming only from year no. 3).

For the sake of a couple of hundred dollars you may have cost yourself thousand in non-paper deductions.
I bounced this of my previous accountant and he agreed.

Your thoughts?

Regards

Keen

 

[Ausprop]

I don't understand.... it should be irrelevant. The depreciable amount for an item just expires if you don't claim it i.e. if you are a owner occupier you just don't get to claim the years of depreciation.

 

[Patosan]

G'day Keen,

But I fear that by buying a place with a sitting tennant, it is blatantly obvious to all and sundry that the place was tennanted previously and you are in no other position but to claim a reduced amount of deductions (ie the previous 2 years were claimed by the previous owner you can start claiming only from year no. 3).
Keen

How could you claim the previous 2 years if the place wasn't tenanted ?
Tenanted or not you can only depreciate from your purchase ... year 3 in your example.
You should get a QS in to do a report, to maximise depreciation AND stay kosher with the ATO.
I believe it's irrelevant as to whether previously rented, currently rented or was owner occupied.

I imagine your accountant didn't fully grasp the idea you were putting across ... otherwise perhaps you should get a new one. Having said that I'm prepared to put in my place by any other accountants or QS who wish to give a more professional opinion.

 

[depreciator]

This is really accountant territory, but I may be able to add something to the discussion.

The building itself depreciates at a flat rate from when it was built regardless of whether the money is claimed or not.

So let's say a property is built in 1990. The building will depreciate at 2.5% per year until the year 2030. If an investor owns it during this period, they can claim the available depreciation on the building for the period they own it. If they own it for 3 years, they get to claim 3 x 2.5%.

Then there are the Depreciating Assets i.e. carpet, stove, air con etc.

If a previous owner has been depreciating these and there are written down values in the contract for these items, you would be obliged to run with the written down values.

Having said that, I have never seen a residential sale contract with written down values. This is something reasonably common with commercial properties.

So, it is easy to find out whether a property was owned by an investor - the agent will know. But this is irrelevant. What you would need to know is whether that investor has been claiming depreciation. The only way you could know this is surely if the written down values of Depreciating Assets were itemised in a contract.

That's my understanding. Over to the accountants now...

Scott

 

[Keen]

Perhaps I wasn't clear in my post.

My question is the scenerio which depreciator has answered.

Depreciable items (ie carpets etc) that have already been claimed by the previous landlord are technically already written off.

As depreciator has stated this appears hard for the ATO to prove - but I'm curious if the ATO has the resources / databases to confirm if such initial claims been made prior to a new landlords purchase.

Regards

Keen

 

[depreciator]

The ATO would presumably have the ability to do this, Keen, but they may not have the inclination. It would be messy.
Scott

 

[Ausprop]

interesting topic this. Could be wrong here but it would make sense to me that if you buy a place with say a dishwasher in it... the original owner bought it for say $1000. then they depreciated it for $800 so the written down value was $200. If you then bought the property and determined that the value was $500, I would imagine that what should happen is the original owner enters a balancing adjustment of $300 income back into their records. You put the dishwasher on your boooks at $500 and away you go.

The practicalities of how this could all work are another matter. The person selling could argue that they sold it to you for $200 and therefore that is the market value. The reality is that it would never be discussed and you would be left to make a guess.

I have to say this area of depreciation is a complete nightmare IMO and the tax office doesn't help. If you are not technically capable of itemising your depreciable items you do the right things and ask a QS to prepare your report, and then the ATO turns around and says the QS report is too aggressive or they have done it wrong and you cop a penalty. What more could a reasonable person do? Then they say that if you developed the property you cannot use a QS report as you would know the cost of the items. Unless you are actually the builder though how on earth would you know the break down of item values? Or do they use the term developer/builder together i.e. if you developed but used a builder with a lump sum building contract, would they allow a QS repot under those circumstances? I have been told not, but that could be wrong.

 

[Sunfish]

The "book value" of depreciable items is always a subject of negotiation between vendor and vendee. And on a much wider scale than property.

It is not often mentioned at time of sale in r/e but this could be because it is only relevant if one investor was selling to another. More often than not one side of the deal would be a home owner so that, if the buyer, he doesn't care, or if the seller, no data exists. If I sold my IP the buyer would be welcome to my depreciation schedule. Easier for them because quantity surveyor costs are not incurred. Irrevelent to me as long as I am selling at book value.

It's nowhere that simple if I were to sell my business though. If I were to sell that it would be in my interest to sell the hardware at written down value and then add enough goodwill to reach the price I'm willing to sell at. The reverse is true for the buyer. He (am aware the buyer could be a "her") wants the goodwill to be as little as possible because that can't be depreciated in the hands of the buyer, unlike the equipment.

If I were to bow to the buyer's wishes and value the equipment above my "book" value, the increase (sale price - written down value) would then be taxable cap gains in my hands.

Just something to be aware of if buying into a biz. ..... Thommo

 

[DD1]

muddy waters

Ok so owner one gets a depreciation schedule, claims $3k first yera and $2.8k second year then sells.

Doesnt mention schedule in sale and new owner does the same. Due to the value when each schedule was prepared the items would be different in age by 2 years and therefore would have a different book value in each case. So it is still accurate to claim yr 1 deductions each time as they each would reflect current pricing on items accurately if prepared by professionals.

Whats the biggie??

DD1

 

[geoffw]

That's good Thommo.

I have seen a residential property where the vendor (and occupier) specified an itemised price for the chattels (all depreciable items) to the purchaser. As it was the vendor's PPOR, the vendor specified some rather high prices. So the purchaser could specifiy the purchase price of the items in his depreciation schedule.

 

[depreciator]

Yes DD1, theoretically the passage of time will devalue an item regardless of whether depreciation has been claimed.

The way in which a previous owner has been claiming depreciation may, however, be relevant.

Let's say a piece of carpet starts its life at a value of $900. Carpet has an effective life of ten years.

If the owner of that carpet/property has been using the Prime Cost method and not employing the Pool, after 5 years that carpet will have a written down value of $450.

If they have been using the Diminishing Value method and again not employing the Pool, the carpet will be worth just over $400.

If they had been using the Pool, the carpet would be worth $115.54.

Yes, it's nit picking, but relevant to the discussion.

Scott

 

[Brenda Irwin]

I would imagine the ATO is not truly interested in the value of the depreciation, providing your QS has made a report upon purchase and that total amount has been separated from the total purchase price.

How you claim it, ie LVP or effective life, is entirely an individual taxation subject.

My opinion is that it had a value when you purchased the property, and you should be able to depreciate the value, whether if was previously claimed or not.
It is up to the vendor to do a balancing value for his own taxation and really should have nothing to do with your tax return.

Tax returns are for individuals, and are not linked to other tax payers, unless they are joint, etc.

 

[Brizzy Boy]

"Man I should never have read this post" LOL, what a can of worms has been opened here!

I thought it was just simple stuff, My first Ip was the seller's PPOR, second IP was the seller's IP with tenant in place,3rd Ip being built from the ground up.
Have had QS's done hand to accountant who handles the rest from the QS reports.

I think I better put my head back in the sand!!!!
John