Depreciation Deductions

[charlieanne]

Hi everyone,

This is my first time on the forum and was hoping that someone could help me.... I'm a bit confused!

My husband and I purchased a property in 2007 (the property was built in the late 1970s) and lived in it as our PPOR until July 2010. Over this period we completed major renovations throughout the property... new kitchen, bathrooms, complete repainting, flooring etc. Most of the renovations were upgrades (eg. glass splashbacks rather than tiles, caesarstone benchtops rather than laminate).

I have kept every last receipt from the renovation and so know exactly how much everything cost. We did not pay many tradespeople as my husband is an amazing handyman and completed most of the renovations himself.

We ended up moving interstate in July 2010 and put the property on the market (for sale) in August 2010. Nothing really happened and so we put the property up for rent in Jan 2011 and tenants moved in shortly after.

I am just doing our tax returns and am confused with the depreciation deduction/capital works. As I understand, we can claim a capital works deduction for fixed items such as tiling, bath, tapware, toilets etc. at 2.5% per year (up to 40 years) based on the cost of the item (which I have receipts for).

With the capital works deductions does it matter that the items were upgrades to what was in the property prior to the renovations taking place?

Since the tenants have been in the property we had to replace the heating unit and as I understand we can claim a decline in value deduction for this cost over an effective life of 20 years.

Where I am especially confused is with the decline in value deductions for things such as the oven, stovetop, carpet, floating floors etc. which were all replaced when the property was a PPOR - but are still within their effective lives when the property turned into an IP. Can we do up a depreciation schedule and claim a decline in value deduction for these items even though they were all replaced when the property was a PPOR not IP?

Thanks heaps!

 

[Propertunity]

The best advice I could give you is to get a Quantity Surveyor to do up a depreciation schedule for you. Yes, the building depreciation is all gone but you can depreciate your renos and replacements starting from the time when the PPOR became an IP, at a slightly written down amount. You can use the Prime Cost or Diminishing Value method.

Alternatively, you can get your accountant to do it, using your receipts BUT you will get no value assigned from your personal labour (supplied by your hubby).

 

[syba]

Hi charlieanne,

You've got a good start in having all the receipts. In relation to your hubby's labour you can't claim that - can only claim what you actually paid.

The depreciation starts from when it was installed and makes no difference if it was an IP or PPOR at that time. When it becomes an IP, the depreciation at that point then becomes deductable.

Using the Prime Cost method of depreciation as an example (only because it's simpler to use as an example), say you have an item you paid $1,000 for and it has a life of 10 years. The property is your PPOR for 2yrs after this is installed so over that time the depreciation on that item would be $200 ($1k x 10% x 2yrs). Now the property is an IP so you can claim the balance as a deduction - ie $800 over 8yrs ($100/yr).

Decline in value is the same principle - starts depreciation when item is installed and claimable when it becomes an IP.

With replacing the hot water unit some time after the tenants were there, the remaining undeducted value of that item can be written off in that FY and new depreciation starts on the new hot water unit. If you replaced it while it was a PPOR then you can't write off the undeducted value as it wasn't an IP therefore not deductable.

Hopefully you can understand my ramblings. In short, your answer is yes you can definately do a depreciation schedule.

 

[charlieanne]

Thanks!!!

Thanks very much for your replies Propertunity and syba. Very helpful.

Thanks for going through it in so much detail syba, exactly what I needed to know.

I will sit down and finish this tax return now, yay!