Depreciation Prime v diminishing cost over long term

[JPS25]

Which is the best method of depreciating when holding the property for the long term. This is our first investment property and we do plan on holding it for at least 15+ years all going good, as hopefully it will be the first of many, which we will then start selling one at a time to fund retirement and travel after stopping work?

Also are we right in thinking that all amounts claimed in depreciation then gets taken off the base cost before working out the 50% capital gains after selling?

Thanks for any help

JPS25



JPS

 

[Rob G.]

Which items ?

Buildings and fixtures can only use prime cost over their statutory life, usually 40 years. Any deductions claimable come off the CGT cost base.

Plant, and articles which are not fixtures, can be deepreciated over their effective life using diminishing value or prime cost. They are not subject to CGT to the extent they are used for a taxable purpose.

Diminishing value means larger initial deductions (twice as big !). Time value of money, cash flow etc.

Cheers,

Rob

 

[syba]

It all depends on your situation. Most people tend to choose the Diminishing Value method as you get more deductions in the first 5 years. Typically that is when you really want the biggest deductions as the interest/expenses you are paying is normally a fair amount more than the rent you receive (so the depreciation makes it not hurt as much finacially). Over time your rent should go up which would (in theory) compensate for the reduction in depreciation claimable.

Generally speaking, the diminishing method is better the first 5 years, and prime cost better the 5 years after that, with them both balancing out after 10 years (ie the total depreciation after 10 years is fairly even between the 2 methods).

The one other thing to consider is that most depreciable items after 10 years or so using the prime cost method are fully written off, whereas the diminishing value method in theory goes on forever. After 10 years, you'll still have a hundred dollars or so left, slowly whittling away.

I hope this helps.

 

[JPS25]

Thanks Rob and Syba, we will take your advice and go with the diminishing cost as you say.

 

[Mry]

I have seen 1 person in 15 years of doing rental property tax returns claim prime cost, and that was because he came over to us from an accountant who didn't know much about depreciation. I can't see any reason at all to use prime cost.

 

[travelbug]

When you get the report done it will show you figures for both for the next 20 years. Just look at them and the decision is obvious.

 

[JPS25]

Thankyou will definitly be doing the diminishing way

 

[SWS]

Depreciation Prime vs diminishing cost over long term

**BUMP**

First year of taxation occurred last year on a brand new property.

If in the first year the claim was for Prime method, can I overturn that decision in year two and adjust last years return and go forward with Diminishing method?

 

[depreciator]

Nope. You cant switch from one method to the other. I bet plenty of people do, though.

 

[speary]

At work we pretty much only use prime cost. It really depends on the purpose of the IP. In the case of a long term hold, the method doesn't make a huge difference other than the time value of money argument. We figure, in 5 or 10 years time, that your personal income may be higher, rents are likely to have increased, your interest deduction may have decreased and you may even be in a higher marginal tax rate, so therefore there is value in preserving some of your depreciation.

I think its funny that Mry, assumes that the previous accountant didn't know much about depreciation, as I am sure they have their reasons.

 

[syba]

Most people use diminishing value rather than prime cost. Reason is that when they first buy a property things are pretty tight and the increased deductions are more beneficial (the first few years in particular are much higher as the depreciation rate is double prime cost, plus you can write off items <$1000 much quicker in a low value pool). Also, over time the rent you receive should increase as the deductions reduce, thus the extra rent offsets the lesser deductions. But it is a personal choice and some do use prime cost.

 

[Paul@PFI]

**BUMP**

First year of taxation occurred last year on a brand new property.

If in the first year the claim was for Prime method, can I overturn that decision in year two and adjust last years return and go forward with Diminishing method?

You can amend within the 2 year period and then use the other basis. Other than this method you cant change.

 

[Paul@PFI]

Tax agents avoid prime cost if they know what they are doing.

Everytime Govt does budget and allows accelerated depreciation they seem to exclude PC since its formula is meant to be linear....Thus Dim Value Mtd is the preferred basis. It brings fwd deductions. A $1 today is always better than a $1 tomorrow.

Good explanation here (I dont use them)

 

[SWS]

Perfect thank you so much for clarifying.

Unfortunately I accepted the advice of tax agent without query and have been wondering about this for the last few months ...

 

[Rixter]

Diminishing value method for me.. investing/business is all about maximising one's cash flows & minimising one's risks where ever possible.