Depreciation on new or reno

[Lars]

Hi all,

If I had exacty the same kitchen with exactly the same appliances, same size, benchtops, etc in the three following contexts, how would the depriciations differ (disregard fittings that is part of a depreciation schedule):

1) In a brand new house.

2) In a house about 10-15 years old where I ripped out the old kitchen and renovated just after I bought it.

3) In an older house that is built before 198x (does not have current building cost depreciations) where I ripped out the old kitchen and renovated just after I bought it.

My questions are:

1) The kitchen would be part of the building costs and depreciated over 40 years.

2) Would the reno costs be added to the existing building costs and be depreciated for the remainder of the 40 years or would another part of the building costs be added that starts at year 0 and continue for 40 years.

3) Would the reno add a new building cost that can be depreciated over 40 years?

Cheers,
Lars

 

[mross]

when you rip out a kitchen and the building is eligible for division 43 building allowance you can write off the undeducted value in the year of disposal.

You then add your new kitchen at the rate of 2.5% from the date of it's first readiness for use. i.e. when it is finished. So you will have two separate building allowance items in your schedule. The same applies to all plant and equipment, but does not apply to low-value pool items which can not be written off.

If the building is inelgible for building allowance, you can not get the write-off, but you will be able to claim the new depreciation at 2.5% for 40 years.

All of this assumes a reasonable period of time between buying the property and renovating. i.e. you must have earnt income from the property in order to claim depreciation at all. If you pull out a kitching from your own home before renting it out, you wont get the immediate deduction because the property is not available to let until the new kitchen has gone in.

Michael

 

[Lars]

Thanks Michael,

Just to clarify. If I purchase an IP and immediately start to renovate and keep on renovating for 3 months, during the renovation period I will not be able to depreciate anything (not building nor plant) as the IP is not available to let.

As soon as the reno is finished and the IP is on the market to let I can start depreciating again?

This means that I must factor this depreciation-free period into my budget for the IP purchase/reno.

You mention a reasonable time, I have seen a year being mentioned elsewhere?

If I wait a year to renovate and the renovation still takes three month, wouldn't the IP still not be available to let for the reno period? Can I continue to depreciate building and plant during this period?

Cheers,
Lars

 

[mross]

All good questions Lars,

Dale might be able to clarify this, but in my opinion:

1. you will not be able to claim depreciation if you renovate immediately after purchase until after the reno's are complete. That is unless you have the building occupied while the reno's are complete. Ther have been other discussions about having the property listed with an agent, or a letter from an agent. Look into that.

2. If you wait a while in order to get the write-off allowances which can often be substantial, you will still get the depreciation over the three month of work so long as the property is essentially being used to derive income. i.e. PPOR for 1 year, then renovate = no allowances for 3 months. IP for 1 year then renovate depreciation continues on items retained in the demo.

hope this helps, I think I've confused myself now

Michael

 

[Lars]

Michael,

So if I buy a brand new IP and get a QS report then the cost of building the kitchen would be baked into the total building cost. I presume this cost would be based on information from the builder reflecting the real costs.

If I renovate an older building and get a QS report would this also be based on real renovation costs that I supply to the QS or would the QS estimate the costs. Do I really need q QS report, could I just take all receipts for the renovation and depriciate this sum. Maybe a QS report would give me a higher value, especially if I do a lot of the labour myself (which I would not have any receipt for).

If I use a QS for both scenarios I presume that the bottom line would identical, the cost of the kitchen would be the same?

I guess that this renovation period immediately after purchase of an IP should be as short as possible. Would this be a good reason to negotiate early access to the property before settlement and start renovation before the depreciation can start anyway, maybe the seller could still depreciate while I renovate?

Thanks for your answers.

Cheers,
Lars

 

[geoffw]

Originally posted by Lars
I guess that this renovation period immediately after purchase of an IP should be as short as possible. Would this be a good reason to negotiate early access to the property before settlement and start renovation before the depreciation can start anyway, maybe the seller could still depreciate while I renovate?

Lars,

People in the know do this- they get access to the property before settlement, and finish before settlement. It cuts down substantially on the holding costs. If you can do all the reno before settlement, then you have no lost rent (well, as long as you rent is reasonable).

But the same PITK say that there are risks with that. I guess if the vendor sees that you've added 20% value to the property, he might be willing to pay you the 10% penalty it would cost him for breaking the contract.

On receipts- they've been noises that you require receipts for what you've done yourself, and that QS reports are not adequate for this. There was something in API magazine a while back.

Any thoughts from people who've had experience in this?

 

[astroboy]

no xperice GW
thought about it ,, but it is risky. Anyones acct/sol will tell you no go. But..... still risky depends on your risk/return. Only you can answer that.
astroboy.

 

[XBenX]

sorry astro - i dont understand what you are trying to say

can u please clarify ?

geoffw - my understanding is the same as yours ...just from what ive read in previous posts.... you can only use the QS where you dont have the actual costs. So if you've done the reno/repair etc then you should have the actual costs and be able to use them

 

[Lars]

XBenX,

If I use receipts how would I value the labour that I put in myself?

I don't want to transfer any money from my IP account to my personal account and declare this amount as income and pay tax.

Is it so that if I use a professional builder his cost would be part of the building cost and depreciatable and if I do the job I will loose this (regardless that my total cost is less).

Cheers,
Lars

 

[Jas]

Originally posted by XBenX
sorry astro - i dont understand what you are trying to say

can u please clarify ?

geoffw - my understanding is the same as yours ...just from what ive read in previous posts.... you can only use the QS where you dont have the actual costs. So if you've done the reno/repair etc then you should have the actual costs and be able to use them

The most important point here, is that the ATO will accept a QS report. In general, they will price things higher (include labour and don't notice you bought it from Clints). If they price things lower, you 'find' the reciept.

Why wouldn't you use a system to get a bigger deduction when the ATO are happy with it?

Jas

 

[Les]

G'day Lars,

A good point to ponder, my man:-

Is it so that if I use a professional builder his cost would be part of the building cost and depreciable and if I do the job I will loose this (regardless that my total cost is less

Depends "how much less" doesn't it? e.g. if a builder is going to charge (say) $1000 to do the job, but you can do it for $300, why would you NOT do it yourself???

(I'm assuming you are not an accident waiting to happen with power tools, here) - but, Tax deductions peak at 48.5% - so if you can "save half the cost", or more, aren't you ahead by doing it yourself?????

But then, if it's part of Building cost, we're talking 2.5% per annum !!! Returnable over 40 years - but not really, if you sell!!! He gives a guarantee - yeah? Will he still be in business when you need him??? As I said earlier - points to ponder....

Am I missing something? Dissenters welcome (I learn LOTS that way )

Regards,

 

[Lars]

Hi Les,

Yes, I agree that it would be cheeper to do the job myself. If Jas is correct that the ATO will accept a QS report, then the best option would be to do the job myself and have the QS value it as if a builder had done the job.

Back to the kitchen...
If I buy an older IP in which I renovate the kitchen, can I write off the old kitchen if I rip it out? How do I know how much it was worth? Does the QS report have the building cost as one sum or does it specifically state that the kitchen (or the bits in the kitchen) is worth $xxx?

Cheers,
Lars

 

[XBenX]

Originally posted by Jas
The most important point here, is that the ATO will accept a QS report. In general, they will price things higher (include labour and don't notice you bought it from Clints). If they price things lower, you 'find' the reciept.

Why wouldn't you use a system to get a bigger deduction when the ATO are happy with it?

Jas

good point

but from a previous post of dales I got the impression that you would be expected to keep the relevant receipts

??

 

[Les]

G'day Lars,

Good to meet you the other night....

Back to the kitchen...
If I buy an older IP in which I renovate the kitchen, can I write off the old kitchen if I rip it out? How do I know how much it was worth

I "believe" you can - either have a QS visit twice, or (ring them first and check this will work...) have them visit after you're done, but KEEP the old kitchen cupboards, etc. until they've seen them.

As I understand it, if you've bought an IP for $x00,000 - that price includes all that was within the IP. Now, if you are replacing something, there are a few points to consider:-

If you are replacing an item (carpet, kitchen, curtains, etc) upfront, then the old item could be depreciated immediately. The new one will also be valued, and written down accordingly - BUT BE CAREFUL !! I DON'T KNOW this area with any certainty - check with your Accountant before you do it!!!

The words (I think) I've heard are "Repairs are deductible, improvements are not". Maybe the subtle difference here is in the word "deductible" vs "depreciable". I GUESS a repair can be completely claimed as the cost is incurred, while an improvement maybe only can be "depreciated" at whatever appropriate rate. As above, make sure you KNOW from the right source just what you can/can't do before doing it. (Some things are just so darned confusing )

Does the QS report have the building cost as one sum or does it specifically state that the kitchen (or the bits in the kitchen) is worth $xxx

QS reports are quite detailed, and certainly "break things down" into their various categories. The ones I've had done have had (usually) 10 to 12 pages of detail - with different alternatives laid out (e.g. using Diminishing Value or Prime Cost for depreciation) so that you can chose what is best for you. Also, if you've made them aware that you are replacing something, then the replaced item(s) should be mentioned separately within the QS's report.

I'm sure others can shine a light on the areas that I find cloudy - and I'm interested in understanding them better too. But, be sure you check with your Acct too.

Regards,