Getting blood out of a stone?

From: Steve McKnight


Hi,

I have been reading with some interest the odd post from time to time about quantity surveyors.

I thought I'd add some flesh to the discussion by outlining the role and use of a quantity surveyor and also distinguish between the two types of allowable depreciation.

About Quantity Surveyors
------------------------

A quantity surveyor is a consultant who specializes is going through a building and inspecting it from the perspective of valuing the building and contents of a property after it is constructed.

Based on the assessed value, the investor can then use the quantity surveyor's report as the basis for claiming depreciation and capital works tax deductions.

Depreciation tax deductions
---------------------------

You can generally claim a tax deduction for depreciation associated with the fixtures and fittings in a rental property.

This usually relates to furniture, carpet, light fittings etc.

Depreciation is a non-cash accounting expense. It exists to try and match income with the cost associated with generating that income regardless of what cash is physically paid.

For example, imagine you earn cash rent but pay no repair bills during the year.

Accountants will try to match the rental income with physical general wear and tear of the building even though you didn't pay any repair bills during the year.

The amount of wear and tear on furniture and fittings allowed by the tax department is currently 13.33% per annum on a reducing or diminishing balance basis.

Capital Works
-------------

In limited cases you may also claim a tax deduction for capital works associated with the construction and improvement of income producing buildings.

The rules in this area are complex, but let's just say that you may claim between 2.5% and 4% of the cost of the building / structural improvement on a straight-line basis.

For example, buying a property with a structural cost of $100,000 and constructed seven years ago would give rise to a maximum capital works deduction of $2,500 per annum.

About depreciation benefits
---------------------------

Depreciation benefits are attractive to some property investors because they can reduce or perhaps eliminate your tax bill.

But they can be double edged sword.

If you make an allowance for future expenditure but don't actually spend the money, then in the long-term your property will suffer and the quality of the tenant you attract might be compromised.

Personally I don't factor too much into depreciation benefits and I keep them outside of my investing decision.

I believe that the deal must stack up regardless of depreciation benefits because once the benefits expire then the cashflow must stand alone.

Also, my accounting background tells me that it is a false economy to depreciate an appreciating asset like property.

Sure, you save tax today to pay more tax tomorrow, if you sell.

Back to surveyors
-----------------

The job of a quantity surveyor is to walk through a second-hand building and provide a figure that you can reasonably claim for depreciation and capital works.

The surveyor is paid for his/her report, which means that before you engage a quantity surveyor you need to ensure that the after tax cash benefit you'll receive is worth the cost.

As a rule of thumb, any unrenovated house older than say eight years will have little depreciation benefit and any structurally unimproved property older than twenty years will have little capital works available.

Bottom line
-----------

Remember that when you buy a property there are three components to the value:

1. The land value
2. The building value
3. The fixtures and fittings value

In real estate you can say that the building and contents depreciate and the land appreciates in value.

A quantity surveyor can determine a value for the building, which can be written off as capital works and also the fixtures and fittings, which can be depreciated.

But remember that you should always be investing to make money rather than save tax.

I hope you have enjoyed this article.

Steve McKnight
www.propertyinvesting.com
 
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Reply: 1
From: Glenn Mott


Steve,

Thank you very much for this post. We are indeed fortunate to benefit from the wisdom you have gained.

Glenn
 
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Reply: 2
From: Nigel W


Steve

Like the other forum members I'm always interested to hear what you've got to say.

I agree with everything except where you say there's no point getting a QS' report on older properties .

In my experience (and I've only gotten 4 reports) the benefits revealed by the depreciation schedule produced was far in excess of the measly $385 or so charged by the QS. In fact in the first year it was anywhere between about 4-8 times paid for by the tax saving. All 4 properties are at least 20 years old.

And yes I agree with you that depn is irrelevant to the investing decision - but at the back end, in maximising your cashflow ...well I'll take everything the tax man will let me!
 
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Reply: 2.1
From: Pamela Richardson


Steve

Thanks for your informative, jargon-free advice.

Pamela
 
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Reply: 2.1.1
From: Steve Navra


Really good post!!

Ahem, another one for the:
'Article section' ??
 
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Reply: 2.1.1.1
From: J Parker


Another well written post, Steve. Well done! Though I've used quantity surveyors myself, your informative post explains a few unanswered questions. Keep 'em coming- we appreciate it!
Cheers, Jacque :)
 
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Reply: 2.1.1.1.1
From: Kevin Forster


Is there a point at where there is no use employing a QS? The amount of deductions that can be obtained will be less than employing a QS. For example a 40 year old home would not have many depreciation allowances left on it?

Kevin
 
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Reply: 2.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Kevin

QS reports are not really worth getting if the property was built before July 1985. Before that date, no building allowance is allowed.

However, sometimes an older building has been renovated after that date and then it would be worth doing because the renovations would be written off over time just like the building itself.

Have fun

Dale
 
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Reply: 2.1.1.1.1.1.1
From: Owen .


So an unrenovated property built in say 1984 will not have any depreciation available at all?

I knew about the building depreciation dates but not the fittings a fixtures bit. I recently bought an unrenovated 1994 apartment and got huge fittings and fixtures depreciation because the QS report was based on the purchase price. I was expecting only minimal as the fittings and fixtures were all 8 years old. This wasn't the case.

So if this is the case, how old do the fittings and fixtures have to be in order to get no depreciation if the depreciation is in fact based on the purchase price regardless? Confused!!

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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Reply: 2.1.1.1.1.1.1.1
From: Dale Gatherum-Goss


Hi Owen


>So an unrenovated property
>built in say 1984 will not
>have any depreciation
>available at all?

Basically, this is correct.

>I knew about the building
>depreciation dates but not the
>fittings a fixtures bit.

Fixtures & Fittings is different again. These are depreciated different to the building and at a different rate of depreciation write off.

>I recently bought an unrenovated
>1994 apartment and got huge
>fittings and fixtures
>depreciation because the QS
>report was based on the
>purchase price. I was
>expecting only minimal as the
>fittings and fixtures were all
>8 years old. This wasn't the
>case.
>

Interesting. It does not sound right, but, if the QS has signed the report, you cannot be fined for relying on it and I assume they have PI insurance . . .


>So if this is the case, how
>old do the fittings and
>fixtures have to be in order
>to get no depreciation if the
>depreciation is in fact based
>on the purchase price
>regardless? Confused!!

Depends upon the exact fixture. They all have different rates.

For example, general fittings are written off over 13.5 years and some of the other things like curtains are written off over 6.667 years.

Have fun

Dale
 
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Reply: 2.1.1.1.1.1.1.1.1
From: Owen .


Dale,

I've checked and rechecked the report with the QS and it is right. They are a large Sydney company and have a very good reputation.

As an example I believe carpet has a 10 year depreciation term (I don't have the report in front of me) which to me meant there was 2 years left on it in this case. At about $2000 worth that would be $400 over the next 2 years. However, because it was valued from the purchase price I am getting about $4500 worth over the next 10 years. If I replace it with a $2000 carpet I can scrap the balance and take in this financial year. Bonus.

The QS said that where actual prices and ages are not available on existing property fittings then the values are determined from the purchase price of the property for new purchases. This is the ATO ruling. I still can't believe that if the property was 20 years old that this would still apply but can't get them to confirm either way.

So I'm finding out for myself. I have just asked them to do a report on a property I bought 3.5 years ago (didn't know about QS reports then) and this one was built in 1934. However, the apartment has obviously had work done to it (decorating anyway) over the years so it will interesting to see what they come back with and how much of the common areas they factor in. Even if it's not much, back dating to purchase time should add a nice amount to this years tax.

I'll let you know how it goes.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"
 
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