Depreciation on Rental Properties

[smallbuyer]

I have a few questions about tax on residential investment properties I was hoping the experts here may be able to shed some light on. I have researched these quite a bit but I haven?t come to answers I?m 100% with:

- Is it fine to have some Prime Cost and other Diminishing Value depreciating assets on the same property? From what I understand you can select the type of depreciation on an asset by asset basis (except when you create a pool then you may be forced to move some things to the pool). Eg it may be better to do PC for 5 year assets and DV for 10-20 year ones depending on how long you intend to hold the property and your tax situation in particular years.

- Do you write off any remaining value in a diminishing value asset once it reaches the end of its ?tax life? or does it keep just giving smaller and smaller amounts of depreciation forever unless you move it to a pool?

Thanks a lot

Smallbuyer

 

[Paul@PFI]

You may choose ONE method. Its either DV or PC. Div 43 capital allowances are always calculated using PC in any event. You cant choose on a asset by asset basis.

Your depn schedule will show both options. - Basically its two reports. Pick ONE. Once chosen you cant change. I have always found DV brings forward maximum deductions. I don't use PC. IMO a dollar of deduction today is always preferable to a dollar in a few years.

The schedule will allocate low value assets to the pool as they reach thresholds and write them off. You will rely on the report. Its maximises benefits.

The sole exception is scrapping a asset.

It seems like you are trying to create your own schedule. DONT DO IT. You will never identify the deductions a pro can. I have seen this amount to thousands a year. For a minimal upfront (deductible) cost. Its like DIY dentistry. You wont save a cent.

 

[dan c]

You may choose ONE method. Its either DV or PC. Div 43 capital allowances are always calculated using PC in any event. You cant choose on a asset by asset basis.

My understanding is the opposite, that you can choose to have one asset depreciated by DV, and another by PC. Once a method is chosen it can't be changed, but you can have assets in the same asset register depreciated by different methods.

Once chosen you cant change. I have always found DV brings forward maximum deductions. I don't use PC. IMO a dollar of deduction today is always preferable to a dollar in a few years.

Agree, most would advise that DV is the way to go, especially as now you get double the depreciation, compared to PC, in the first year.

 

[BMT Tax Depreciation]

- Do you write off any remaining value in a diminishing value asset once it reaches the end of its ?tax life? or does it keep just giving smaller and smaller amounts of depreciation forever unless you move it to a pool?

Smallbuyer

The second one. Unfortunately you can't have your cake and eat it too.

 

[Paul@PFI]

My understanding is the opposite, that you can choose to have one asset depreciated by DV, and another by PC. Once a method is chosen it can't be changed, but you can have assets in the same asset register depreciated by different methods.

Agree, but that's illogical. Most would advise that DV is the way to go, especially as now you get double the depreciation, compared to PC, in the first year. The very formula gives a 200% factor v's PC with 100%.

I have never seen a QS report that does this since DVM accelerates the rate v's PC. Its mutually exclusive. You would never have a PC asset with a higher deduction v's DVM so why blend assets that way. This thinking demonstrates a total lack of knowledge of the formula and benefits of depreciation and a likely DIY approach that would underclaim.

I have never found a DIY schedule / builders estimate that claims more than a QS report unless its based on defective assumptions.

 

[dan c]

You may choose ONE method. Its either DV or PC. You cant choose on a asset by asset basis.

I have never seen a QS report that does this since DVM accelerates the rate v's PC. Its mutually exclusive. You would never have a PC asset with a higher deduction v's DVM so why blend assets that way. This thinking demonstrates a total lack of knowledge of the formula and benefits of depreciation and a likely DIY approach that would underclaim.

I have never found a DIY schedule / builders estimate that claims more than a QS report unless its based on defective assumptions.

Sure, QS reports usually list a DV schedule and a PC schedule, and almost always the DV method is chosen because it provides the higher deductions in the first few years.

But, if you then purchased, say, an Air Conditioner, you CAN choose to depreciate it using the PC method if you want to. I'm not sure why you would want to, but the choice IS available to the taxpayer.

Your statement that you can't choose on an asset by asset basis is factually incorrect.

 

[smallbuyer]

Hello,

Thanks for all your input.

I think being able to have as much choice as possible and to be able to push depreciation between years a bit would be good for some people. For most the getting it ASAP is a good idea but some may have low income for the next year or 2 (eg having a baby or big holiday) or expecting high income in a few years (eg thinking of selling a few things with a big cap gain). If you can manage it being able to keep yourself out of a higher tax bracket for 3-4 years instead of only 1-2 this maybe a good thing. Heaps of other factors to consider like how long you think you will keep the house, what you think interest rates and rent will do in the future etc. Just some options for people who want to look closely at their tax affairs and have the time to run different scenarios.

FYI I am looking at depreciation on a newly built house so have all the figures straight from the builder. In the 1st year of a new house there are heaps of extra deductible expenses compared to income as the full years interest, rates etc is claimable while there is only income for part of the year.

Smallbuyer

 

[Paul@PFI]

Free advice : DONT use builder estimates. It will cost you and you have no idea how much. Speak to a QS such as BMT / depreciator and seek their opinion.

Choosing when to claim deductions isn't a feature of the basic framework of tax law. Not claiming a cost just adds to the CGT cost base and defers it a LONG time and may reduce its benefit by 50%. There can be strategies to shift some deductions such as prepaid int.

In the year of construction a larger loss may be evident due to interest and part year income and high deductible depn and Cap allowances but some costs cant be claimed during construction and may be capital. Take care.

 

[smallbuyer]

Hello Paul,

This is a new building that I have built and the builder provided a breakdown of prices for various items they 'included' in the build. I know what the actual costs are of the various items so my understanding is a QS or anyone else can’t change what these figures are. There is no room to estimate as I have the actual costs. The life of these items is on the ATO website so not much room to move there.

You can’t choose when to start depreciating but you can choose what way you do your depreciation which means you effectively choose what F/Y the depreciation falls in to a certain extent. You can also choose if you what an immediate deduction on low cost items and if you want to create a low value pool to speed things up. For someone who knows their tax position and has reasonable estimate of the next few years this can save you money if you are prepared to do the work.

Don’t get me wrong I certainly thing a QS is money well spent for existing houses you have purchased. Even new builds for people who don’t have the time or knowledge to do this themselves a QS is money well spent. I like to spend time learning about and doing this but most people don’t.

One question, if someone get a QS report is there anything to stop them using the DV for some items and PC for others, e.g. have a cut off of items with an 8 year life? Perhaps do this would allow people to adjust their depreciation a little if they need to. Obviously you have to choose the method from the start for each asset you cant change as far as I know once you have selected one method.

If any of my thoughts and ideas are off the mark please tell me

Smallbuyer

 

[Paul@PFI]

Hello Paul,

This is a new building that I have built and the builder provided a breakdown of prices for various items they 'included' in the build. I know what the actual costs are of the various items so my understanding is a QS or anyone else can?t change what these figures are. There is no room to estimate as I have the actual costs. The life of these items is on the ATO website so not much room to move there.

You can?t choose when to start depreciating but you can choose what way you do your depreciation which means you effectively choose what F/Y the depreciation falls in to a certain extent. You can also choose if you what an immediate deduction on low cost items and if you want to create a low value pool to speed things up. For someone who knows their tax position and has reasonable estimate of the next few years this can save you money if you are prepared to do the work.

Don?t get me wrong I certainly thing a QS is money well spent for existing houses you have purchased. Even new builds for people who don?t have the time or knowledge to do this themselves a QS is money well spent. I like to spend time learning about and doing this but most people don?t.

One question, if someone get a QS report is there anything to stop them using the DV for some items and PC for others, e.g. have a cut off of items with an 8 year life? Perhaps do this would allow people to adjust their depreciation a little if they need to. Obviously you have to choose the method from the start for each asset you cant change as far as I know once you have selected one method.

If any of my thoughts and ideas are off the mark please tell me

Smallbuyer

Sorry didn't realise. Forgive me you must be right. Why ask questions if you are so certain.

You have no idea about how a QS prepares a schedule and your post shows it. There is a reason why NOBODY picks and chooses depreciation methods. If you have interest in learning I might suggest a basic course such as a Ba Accounting then get a few years (5 ?) experience in tax advisory and prep and at same time get CPA / CA then throw in a further 15+ years. experience.

Or you could ask a question, listen and give some thoughts to what you hear. I explained why nobody picks and chooses assets at different methods. NOBODY. It provides no measurable benefit. Depreciation is a deduction that occurs over time. It may be bought fwd (DVM) or slowed (PC) [both with very marginal impacts] or incurred if an item is scrapped in some cases. It also impacts CGT so that a greater CGT profit (that is discounted) is made. All unpredictable. Generally a deduction today is best claimed unless your marginal rate is zero. In many cases you cant choose. Your marginal rate is what it is.

You are off the mark in case it wasn't clear.

 

[smallbuyer]

Hello Paul,

I lay no claim to being an expert but I do have a reasonable level of knowledge and experience in this area. I also know enough to ask questions on this forum If you note I asked two questions as I couldn’t find a definitive answer and this forum has people with a huge amount of collective knowledge and wisdom.

You have disagreed with one of my ideas however others disagree with you. Who is right? I have asked one accountant I know and he agrees you select depreciation type on an asset by asset basis. I am happy to get more opinions though.

Perhaps why QS’s don’t do mixed reports is usually all DV is better and they aren’t usually (or ever?) their clients accountant as well so they can’t easily customize the report to maximize the benefit for every person. I also think probably in most cases its hardly worth the effort but perhaps in some it is.

Smallbuyer

 

[Rixter]

DV every time.... the main reason, to maximise my cash flow in the first few years of ownership.

Do this across multiple IP's and the compounding affect turbo's it.

Always look towards maximising cash flow and minimising risk where ever possible.

 

[smallbuyer]

Thanks for your comments

Anyone else got a view on my original question?

Is it fine to have some Prime Cost and other Diminishing Value depreciating assets on the same property?

 

[Paul@PFI]

I don't dispute a taxpayer can choose which method for each asset. Why would they ? I have never found a PC depreciation rate provide a better tax deduction than DV. The two formulas on page 15 are the reason https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind39784n17290614.pdf While in theory you could pick every second item at PC and each other asset at DV it would reduce deductions in every instance v's choosing DV. Choosing PC is a non-conventional approach that without personal tax advice to the contrary I would never give.

You may also end up paying more in CGT too !! I'm often asked by clients why do they bother with claiming QS deductions when it adds back for CGT ? The answer is you are always 50% better off by claiming a deduction v's not. So the very nature of depreciation suggests its always better to accelerate depreciation. The only time it wont work is if the asset is destroyed and it is insured. Then it has an adverse clawback. However the tax cashflow timing still benefits the taxpayer.

And choosing to defer or not claim depreciation can mean a CGT cost base adjustment must be made for deductions not claimed. eg taxpayers who disregard their QS report

 

[smallbuyer]

I agree in most cases all DV is the better option. In my opinion their are some cases though when a mix of PC and DV or even all PC may be better for example if you income will be low for the next few years and much higher after. Seek your own advice on this.

It is good to be sure it is possible to have both DV and PC on one house if it is beneficial to me.

Thanks

 

[dan c]

You may choose ONE method. Its either DV or PC. Div 43 capital allowances are always calculated using PC in any event. You cant choose on a asset by asset basis.

I don't dispute a taxpayer can choose which method for each asset.

You did dispute it in your first post.

Anyway, to the OP, you can choose on an asset basis if you want to.

 

[Paul@PFI]

You did dispute it in your first post.

Anyway, to the OP, you can choose on an asset basis if you want to.

Ok lets no split hairs. You can but you wouldn't. No reason to, no logic and its a waste of time. Thus you wouldn't. That what I meant regardless. You can also choose not to claim tax deductions, overstate taxable income etc. Or to avoid tax for that matter.

 

[smallbuyer]

I disagree. I believe most of the time DV is better but some cases its not the best. Primarily if you know your income will lower in the next few years than in the years after that for whatever reason. To DV in that case would be burning up your depreciation for less return aka tax saving (or maybe none at all if your income is lower enough).

 

[Rixter]

Primarily if you know your income will lower in the next few years than in the years after that for whatever reason.

Just to clarfiy, one's income can lower but not make any difference.. what needs to happen is it needs to lower to the point where it drops you down into the next tax bracket below. When you look at the broad tax brackets in recent years that can mean quite a substantial drop of income.

 

[smallbuyer]

Yeah i mean you know your income is going to be way less in the next few years due to going on a big holiday, having kids etc not just you think you may get a few % pay increase next year something that changes your tax bracket at least once if not twice or more.