Depreciation Question I had never encountered before..?

[mattysavager]

Hi all,

I have an overall understanding of depreciation, scrapping, usable life of things etc, and I can give some really basic and general advice to my clients before telling them to ring a professional.

One of my owners has a unit that is 5 years old, and has been claiming according to her original depreciation schedule.

A set of tenants just moved out, and had damaged the carpets, walls and cooktop. The owner paid for a new cooktop ($650), new paint throughout ($1200), and new carpet to both bedrooms ($850). We claimed the tenant's bond of $2000, so she is still out of pocket by $700 or so.

Now the question that I couldn't answer - is what happens to her depreciation claims? The paint, carpets and cooktop are now brand new - but the owner did not pay the full cost to install these items.

Is the owner only entitled to claim depreciation on the percentage of the cost of the above that she actually paid from her own money?

Matt

 

[tgan]

Ok, this is a bit of a stab in the dark!
I am not an accountant, although I did do a diploma about 25 years ago! and still love numbers!

I suspect that the items that your client threw out (ie, cooktop and carpets), when her accountant does her return, will write them off. There will be a value still attatched to these items at the time of scrapping them.

The cost of the new carpet and cook top will be added in as an expense.
I think?? that they need to be over a certain amount to qualify for depreciation and be written off slowly over a few years.

The painting costs will also be written off as an expense.

The $2000 bond I suspect will form part of her rental income.

Happy to see what the other real accountants say, keen to see if I am on the right track!


Tgan

 

[vaughan]

The tenant's bond (or insurance payout) must be claimed as assessable income to the property.

 

[depreciator]

Probably a few ways to skin it. I'm not an accountant, but I know one of them will jump in.

1. The old stove and carpet will be in the Low Value Pool by now I bet. And the owner will have been using the Pool. So those items need to stay in the Pool and keep getting depreciated.
2. Claim the painting as an immediate deduction.
3. Depreciate the new Assets.
4. Declare the bond money as income.

Or maybe:

Offset the income from the bond money against the cost of the new assets and don’t claim any depreciation on the new assets – continuing to claim the original assets.
That eliminates the necessity to pay tax on the $2K.

I think.

And I bet there are other ways to tackle it.

Scott

 

[GaryT]

1. Bond kept to recoup damages is income

2. Insurance proceeds are offset against existing assets in depreciation schedule. The insurance proceeds are treated as the amount you received for the sale of the plant and equipment which may result in a balancing adjustment. Interesting also to note the income is included in the year of which the expense was incurred.

3. Alternatively (assuming the insurance proceeds was greater than the written down value) you may choose not to include a balancing adjustment amount in your assessable income with regards to the insurance proceeds that relate to the destroyed depreciating assets. If you choose to do this, the cost of the replacement depreciating assets will need to be reduced to the extent that you choose to treat the balancing adjustment amount as a reduction in the cost and/or opening adjustable value of the replacement assets.

4. If you are using a low value pool, then the insurance proceeds are treated as the amount you receive on sale of those assets and allowed for in the closing balance of the low value pool. i.e. the low value pool cannot get below zero so that if the termination value exceeds the closing pool balance, the pool balance is exhausted and any excess is included in your assessable income.

5. The painting is an outright deductible expense.

PS You cannot choose to treat the proceeds as some above have indicated. You must follow tax law regardless of how stupid & complex it may appear.

 

[depreciator]

Yes, an insurance payout would muddy the water, but Matt made no mention of that in his original post. It would not appear that there was an insurance payout.

At least there is consensus on the bond being treated as income and the painting an expense.

I'll leave this thread now.