depreciation on unapproved dwelling

[jsoe]

Hi guys!
It's been a while.
I'm on the hunt for an investment property this financial year. Looked at a few last weekend within Blacktown Council. Found this lovely cottage style 3 bedroom house with a new dwelling at the back (granny flat). The price is slightly higher than normall 3 bedders because of the granny flat, but not too unreasonable in terms of financing wise.

The real estate agent is trying a sales pitch that there is a huge depreciation benefit as the main house was recently renovated and the dwelling at the back is almost new. He is not sure about the council approval on the back dwelling though.

- Does my bank need to know about this dwelling at the back for financing purposes? I'll get them to do property valuation (not kerb side) as the house is recently renovated and looks really good.
- Can we claim depreciation on this sort of dwelling / granny flat? It's in really decent condition and looks brand new!

Please help! Thanks heaps!

 

[MRO]

- No need to tell the bank, they will do their own research to make their decision.

- Yes, you should be able to claim depreciation. I cant see how council approval affects your ability to claim a deduction for this.

 

[jsoe]

Thanks, MRO. So, I can get a quantity surveyor to include all dwellings for the report then? I heard ATO won't allow depreciation on this type of dwelling. And banks won't value them. I must be getting the wrong information.

 

[Paul@PFI]

Tax View

The matter of council approval has no tax implication. The key issue would be if the "granny flat" was occupied on non-arms length terms eg by a parent and rent was token rent to cover costs it may be considered private / board and losses denied...Incl depreciation. Lets assume thats all OK.

That said, the real issue with unapproved dwellings is that YOU may be liable for its demolition. You may encounter byer resistance when you sell...Making the potential value of the property lower than "market". If I were buying I would value the additions an zero and probably value thanm as a cost equal to the potential costs of demo and waste removal. You need to also question workmanship such as footings, electricals etc...May have been done by a weekend renovator and not comply with BCA. If so it may be unisured ina fire eg electrical fire.

If you get a depreciation schedule I wonder what view of a Quantity Surveyor is...Is it qualifiying expenditure or likely to be valued down ??
Can Mr Depreciator comment ??

 

[depreciator]

I heard ATO won't allow depreciation on this type of dwelling.

I'm not sure why that would be the case if it's a building and Assets that are deriving rent and the dates etc work.

A QS would estimate the build cost and value the Assets as of the first available let date for the new owner. They wouldn't know whether it's an approved building or not.

Here's a thought, too. If the new owner was forced to demolish an unapproved dwelling a year or so down the track, they might be able to claim the residual value of the building and the Assets as a deduction.

Scott

 

[Rob G.]

If its an owner-builder then they are required by tax law to provide you with the construction cost.

If it was done by a spec builder then they are often evasive and obstructive in providing the information because you can work out their profit margin.

However, the ATO doesn't seem interested in pursuing them - which makes good business for the QS.

Cheers,

Rob