Depreciation report prior to demolition

[eggnog]

Is there a need to get a depreciation report prior to demolishing a house?
Or is there enough info in a current depr. report for your accountant to bring forward all allowable deductions?

 

[DaveM]

You would want to get a scrapping report which a depreciation company can provide.

Alternatively, you can ask fullylucky if he has a report he can send to you from the paddle pop stick house he demolished when he was 7.

 

[depreciator]

If you have a current Dep Schedule on the property and you have been using it, chances are all the information you will need upon demolition will be there.

 

[eggnog]

Somehow I knew there was gonna be a witty comment about fullylucky

Thanks depreciator. I do have a current depreciation schedule that i have been using every year for my tax return. I'll ask my accountant if the report is good enough.

And for anyone that's thinking of asking, no I did not prepare it myself

 

[evan1875]

Hey Scott,

I am in a situation where I have owned an old house for the last 12 months with the intention to develop. It is owned by a company trust.

I have not done a dep schedule. Looking at demolition in 3 month and going onto the build (4 units).

What do you recommend in my situation? Is a schedule necessary?

Regards

 

[depreciator]

I can't comment on whether the trust complicates things, but if it is an old, unrenovated house, the only value will be in the Assets: appliances, floor coverings, HWS etc.
If you have been renting the place out, when you toss those Assets they have a residual value.
If you are not planning to claim depreciation, I'm not sure whether there is any point in getting a Dep Schedule.
Taxpayers can ascribe a WDV to Assets.

But if the place has been renovated, there is more scope and you will need to get a QS involved to cost the Cap Works being disposed of.

 

[BMT Tax Depreciation]

You would want to get a scrapping report which a depreciation company can provide.

I thought it worth briefly addressing something else here, even though Scott has already given the answer to this (i.e., that if it's a demolition you can pretty much write off all residual values).

Generally the term "scrapping report" is a misnomer: there's the original report and then the updated report that covers the property post-renovation. The value to be scrapped can be given with the updated report but if everything original is being knocked to the ground, or if any remaining depreciation belonged to disposed-of plant items, then anyone will be able to calculate this.

If you are not planning to claim depreciation, I'm not sure whether there is any point in getting a Dep Schedule.
Taxpayers can ascribe a WDV to Assets.

This is true but in our experience a.) taxpayers/accountants don't necessarily think of all depreciable plant items (every little bit counts!) and b.) they tend to go with safe values, not maximised ones. Depending on what's there, the extra deductions found usually make it well worth paying for a report.

 

[Paul@PFI]

Evan,

I have a client that boat at moment. Importance is that you rented the former res and the replacements. Assuming this is OK then the scrapping may leave the trust with a quarantined loss. Worth considering that the QS deductions after the new build may mean pos cashflow = neg gearing without the scrapping and it will depend how the trust is structured / geared etc. Worst case you could end up rolling revenue losses along for a few years.

In time it will turn +ve OR you will sell some. Either way the loss should be capable of being claimed to offset income or even Cap Gain IF the trust election and other issues are all good.

Worth running past your tax person to discuss the merits. All cases are different. Some trusts too. My clients deduction is $45K. His strategy is to delay obtaining a QS report until his trust has used up the c/fwd trust losses. Then he will get a QS report. Take around 10-11 mnths.

 

[Paul@PFI]

I thought it worth briefly addressing something else here, even though Scott has already given the answer to this (i.e., that if it's a demolition you can pretty much write off all residual values).

Generally the term "scrapping report" is a misnomer: there's the original report and then the updated report that covers the property post-renovation. The value to be scrapped can be given with the updated report but if everything original is being knocked to the ground, or if any remaining depreciation belonged to disposed-of plant items, then anyone will be able to calculate this.

This is true but in our experience a.) taxpayers/accountants don't necessarily think of all depreciable plant items (every little bit counts!) and b.) they tend to go with safe values, not maximised ones. Depending on what's there, the extra deductions found usually make it well worth paying for a report.

That a good point. If the taxpayer has a QS report they are obliged to write-off the destroyed assets less any value received etc for any scrap value. Its no different when you sell the IP - The cost base is adjusted. You cant just ignore the disposal of the plant and equipt. Scrapping isn't that complex. Its about acting on the known information. Those without a QS report miss out. Those with an outdated QS report miss some benefits.

Some accountants have argued with clients about if they can claim a deduction for what amounts to loss of capital. Answer is YES if certain conditions are met. The asset must have been used for earning assessable income and the use of the land + replacement asset needs to be producing future income. You cant rent one day, demo the next, redev the site and sell.

You cant choose to ignore the former AC, kitchen reno and building works and just allow those costs to roll into the value of the land. They cant become a CGT cost base element as they don't exist.

That said I have seen scrapping bite too. Client IP was burnt to the ground. The insurer paid out and the difference between funds received and scrap value was assessable. There are concessions if its rebuilt quickly that allow that profit to roll into the cost base as an adjustment. This client didnt rebuild in time.