How much can you claim when you no longer rent the property after the tenants leave?

[kylieshines]

Early this year (before June 2010), tenants have moved out of my unit. Different
tenants have continuously been in the unit for more than 10 years - I have never lived there.
All of the wear and tear and 'damage' has happened when tenants have been in there.

I won't be renting it out any more. I will either move in, or sell it.
I'm not yet sure which - please let me know if it makes any difference to what I can claim below.

I have read and researched a lot until I was blue in the face (including reading
past Somersoft posts), but can't really find (m)any explicit examples showing what you can
claim right after you've stopped renting the unit.

I am in the process of renovating the whole unit. Because most the unit is in a bad state by now,
I found it necessary to replace most things rather than 'repairing' them.
It will cost a lot of money, but because I'm mostly 'replacing' rather than 'repairing',
and I won't be renting it any more, I'm getting the impression from the tax laws that I won't
be able to claim much tax relief at all, even though the tenants did the damage?


--------------------------
1) Repairs and Maintenance
--------------------------

For things which are genuine "repairs" and "maintenance" under ATO's definitions,
the Rental Properties 2010 booklet p12 and example 12 seem to be saying that
I can deduct the repairs as long as I do the repairs in the same income year as
when the property was last available for rent (i.e. that I can claim repair expenses
up to 30/6/2010). That means I can't claim any repair at all from 1/7/2010 onwards?

Is that right? It sounds a bit strange to me that it depends on the exact date the
tenants move out. What if someone's tenants move out just before 30th June
(and the property won't be rented any more after that) - does that mean that person
wouldn't be able to claim any "repairs" at all?

(It would make more sense to me if everyone could claim repairs within 12 months
of the tenants having moved out, not just people whose tenants move out on 1st July).

For any "repairs" I incur from July 2010 onwards, then I think I can add them to the
cost base when I sell the unit, and pay less capital gains tax then - is that right?


------------------------------------
2) Car travel expenses/accommodation
------------------------------------

The Rental Properties 2010 booklet explains how to claim car travel expenses if you
"travel to inspect or maintain your property".
- As above, will I only able to claim this up until the 30/6/2010?
- If I do a car trip, and on that day is not related to any "repairs" but is related
to "replacing" an item which is not necessarily tax deductible, can I also
claim my car travel expenses for that day?

EXAMPLE: Later below I am asking if I have any tax relief for my new kitchen replacement.
IF I don't, am I still able to claim my car trips which are related to that?
- For those car trips which I can't claim immediately, can I add them to the cost base
of the property when I sell it?

Accommodation:
While the new kitchen was being built, I stayed at a hotel nearby every night
so that I wouldn't get have to get up at extremely early hours every morning.
I took accommodation purely for that reason, and it wasn't a "holiday" in any way.
I live 40kms away from my property - that's far for me, but is it "far" enough for ATO?
Is the accommodation deductible?

From http://www.ato.gov.au/individuals/c...02/002/014/003&mnu=43443&mfp=001/002&st=&cy=1
"What overnight stay expenses can you claim?
You can claim a deduction for travel expenses for travelling to your rental property if:
* you own a rental property that is far away from where you live
* it would be unreasonable to expect you not to stay near the rental property overnight when making an inspection.
At http://www.ato.gov.au/individuals/c...02/002/014/003&mnu=43443&mfp=001/002&st=&cy=1
it shows an example of overnight stays to perform repairs on a property.

Most examples I've read about accommodation seem to deal with "flying" to the property.
Is living 40kms away by car going to be enough to claim accommodation?


----------------------
3) Asbestos inspection
----------------------

Is an asbestos *inspection* tax deductible in any way? I had an asbestos inspection
done which has detected asbestos, but I haven't decided if I will remove it yet.
(Usually you want one company to do the asbestos inspection, and a different company
to do any asbestos removal, to avoid conflict of interest.
)


The following articles deal with asbestos *removal* which I haven't done yet: does
anybody know if the same principles apply to just an asbestos *inspection*?
- http://www.propertyupdate.com.au/articles/depreciation---the-forgotten-tax-deduction.html
Download the "Secrets of Depreciation" booklet.
- http://www.brisbanetimes.com.au/mon...a-tax-deduction-minefield-20101010-16dlj.html
- Taxation Ruling TR 97/23 "Income tax: deductions for repairs"
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9723/NAT/ATO/00001
- ATO ID 2004/720
http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2004720/00001


----------
4) Kitchen
----------

I've replaced the whole kitchen because it's not worth repairing it - too much
severe water damage and other damage.

I believe the kitchen cupboards are a capital item, so the best one could do is to claim
capital works deduction (2.5% yearly over 40 years I believe?).

This website describes my situation almost exactly:
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183233.htm

The only thing is that I assume that person's property is still available for rent,
but mine is not.

Because I will no longer be renting out the property, does that mean that I
CAN'T claim this capital works deduction at all?

That sounds very unfair - the tenants did so much damage to the whole unit
that it's necessary to replace items rather than repair them. But is that just how
the tax laws are?

Let me know if there's any way I can pay less tax against that.
In many of the other units in the block, the original kitchens etc. are mostly
in great condition because the tenants have taken good care of them - it was
the tenants which did the damage in mine through neglect.

In addition, I don't think the new kitchen is an "improvement" - it's new,
but it doesn't add anything that wasn't that before.

If I can't claim anything right now, then I think I can add the above costs to the
cost base when I sell the unit, and pay less capital gains tax then - is that right?


----------------------------------
5) Kitchen appliances (oven, etc.)
----------------------------------

My understanding is that new kitchen appliances (like oven, rangehood, cooktop)
can be claimed as depreciating assets. This is shown in the same URL as above i.e.
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183233.htm
and in the Rental Properties 2010 booklet it shows that ovens/rangehoods/cooktops
all have an effective life of 12 years.

But again, can I actually claim these given that my property won't be rented any more?

(The above seems clear, but one thing confuses me about things like stoves and refrigerators :
The Rental Properties 2010 booklet p12 says this:
"However, the following expenses are capital, or of a capital nature, and are not deductible:
- replacement of an entire structure or unit of property (such as a
complete fence or building, a stove, kitchen cupboards or refrigerator)
....
You may be able to claim capital works deductions for these expenses – for more information,
see Capital works deductions on page 19."

This seems to be saying that for new stoves and fridges, you can only
claim a "capital works deduction" (i.e. 2.5% yearly over 40 years). This sounds
wrong to me?
The URL above i.e.
http://www.ato.gov.au/individuals/content.asp?doc=/content/00183233.htm
seems clear that these items are depreciating assets with an effective life,
and not "capital works deductions".

Otherwise, why would the same Rental Properties booklet explicitly list them as
having an effective life of 12 years if you can never use that?

If you look at Taxation Ruling TR 97/23 "Income tax: deductions for repairs"
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9723/NAT/ATO/00001
it says the following, but I'm still just as confused.
Is it trying to make a point of free-standing vs fixed stoves??

"33. The cost of replacing things such as free-standing stoves,
refrigerators and furniture in premises used for income purposes is
capital expenditure and is not deductible under section 25-10. (Note,
however, that these items (if they are not permanent fixtures) are plant
on which depreciation is allowable: see Taxation Ruling IT 242.)"
)


--------
6) Tools
--------

I have specifically bought a number of new tools to keep at the property
to perform repairs, e.g. a drill, hammer, etc.
All of these are individually under $300.

Can I claim these as a deduction? I am using them to perform repairs now,
but of course in the future I will continue using them for general
non-income-producing purposes, and the property is no longer available for rent.

 

[kathryn d]

Your rules are very similar to Canada (before anyone beats me up on this point !!!)
Where you have already started renovations, I would seriously reconsider renting it out for another 6-12 months. This would give you some tax relief.

If you hadn't started any repairs, I would have suggested you get it appraised for value now, so to establish a lower capital gains base. Then if you decided to sell, move into it for a year, do the renovations and there would be no capital gains, because it is a PPOR. Then sell if you want.

I don't think the ATO will believe 40kms is a reasonable distance to justify staying at a motel, unless you can show it would be cheaper than driving back and forth.

Repairs made,when it is no longer be available for rent...I think they would deny if you were audited.You may be able to get around that by advertising it as available, at slightly above market rent,then if you still don't have a tenant by completion,take it off the market.

Kitchen appliances are about the same.
To take advantage of all the tax benefits, get a tenant in there for a short period of time.Start advertising it as available now. Discount rent while work is being done?

Edit: You can also contact the ATO on how you can make it tax deductible too.

 

[Rob G.]

Early this year (before June 2010), tenants have moved out of my unit. Different
tenants have continuously been in the unit for more than 10 years - I have never lived there.
All of the wear and tear and 'damage' has happened when tenants have been in there.

I won't be renting it out any more. I will either move in, or sell it.
I'm not yet sure which - please let me know if it makes any difference to what I can claim below.

Enough said ...

The ATO ptactice is to observe IT180 by allowing "repairs" you do BEFORE the end of financial year where you intend to move into your IP after a period of rental.

This does not extend to improvements.

To the extent it is improvements, it adds to the cost base of your depreciating or CGT assets.

You cannot deduct capital allowances or capital works because it is not on the market, there is no scope for the Commissioner to cut any slack on this one as it is spelt out in the legislation.

**BUT** even that may not be allowed if all you are doing "repairs" in order to sell your house because it is an expense to derive a capital gain according to case law.

So go check with your Accountant before splashing out !

You can go back and amend prior year tax returns (2 or 4 depending on your particular circumstances) if you forgot to claim previously.

Cheers,

Rob

 

[wylie]

If you hadn't started any repairs, I would have suggested you get it appraised for value now, so to establish a lower capital gains base. Then if you decided to sell, move into it for a year, do the renovations and there would be no capital gains, because it is a PPOR. Then sell if you want.

My understanding from recent threads on this scenario is that having never lived in it, held it for ten years and moving in for, say five years, before selling it, that the capital gain from purchase to eventual sale is apportioned by the percentage of time it was rented. I don't think the base is established when you move in (but please check this).

I don't think that moving in and having a valuation at that time makes any difference because you have never lived there before.

I also understand that the reverse is treated differently, ie. you live there initially, move out and rent it. If you get a valuation at the time you start to rent it, this means the capital gains tax is based on the increase in value from when it became a rental house until the time of selling.

I have never done either of these, so please check this carefully before spending anything.

I'm sure someone else will come along and clarify this (because I may have it wrong).

 

[Perp]

My understanding from recent threads on this scenario is that having never lived in it, held it for ten years and moving in for, say five years, before selling it, that the capital gain from purchase to eventual sale is apportioned by the percentage of time it was rented. I don't think the base is established when you move in (but please check this).

I don't think that moving in and having a valuation at that time makes any difference because you have never lived there before.

I also understand that the reverse is treated differently, ie. you live there initially, move out and rent it. If you get a valuation at the time you start to rent it, this means the capital gains tax is based on the increase in value from when it became a rental house until the time of selling.

This is exactly my understanding, too.

 

[kathryn d]

My understanding from recent threads on this scenario is that having never lived in it, held it for ten years and moving in for, say five years, before selling it, that the capital gain from purchase to eventual sale is apportioned by the percentage of time it was rented. I don't think the base is established when you move in (but please check this).

Thanks Wylie,
As we have only been "buy and hold" investors ourselves, it is good to get this information first.The OP has messed up her chances in my view for any difference in my thoughts.
I think if planned correctly a person can lower their CG owing.
I will give you 2 examples, and give me your opionion if one has a tax advantage.

Example 1:
Ip value 2000- $200K
Ip value July 1,2010- $290K
have it valued so there is proof of this value
Move in
renovate or repair which has costs $30K
Ip value 30 June 2011- $400K
I think with documented proof you could show the ATO the CG is ($290K-200k)=$90k

Example 2:
Ip 2000 value- $200K
June 30,2010 tenant moves out
July 1,2010 owner moves in & renovate and improve-$30k
Ip June 30,2011 value :$400K
CG ($400K-$30K)-$200K= $170k-18,181 which is 1/11 years you lived there
=$151,819


I agree that if no valuations are done, the ATO would have a standard formula as to determine CG.
If by taking a bit of time, and having a valuation done, you could convince the ATO the situatio has changed and show them why.
Rules are always open to interperation.

 

[Perp]

I think if planned correctly a person can lower their CG owing.
I will give you 2 examples, and give me your opionion if one has a tax advantage.

Example 1:
Ip value 2000- $200K
Ip value July 1,2010- $290K
have it valued so there is proof of this value
Move in
renovate or repair which has costs $30K
Ip value 30 June 2011- $400K
I think with documented proof you could show the ATO the CG is ($290K-200k)=$90k

The rules have already been interpreted, and the ATO calculates your capital gain for an IP turned PPOR via apportioning by time. When it's the other way around, they do it via valuation at the changeover point, under the 'home first used to produce income' rule. Unless you fall within the exceptions listed (eg dates of purchase etc), there is absolutely no discretion for the ATO to vary the method of apportioning the capital gain.

I think it's great that you don't just "take things lying down", kathryn_d, I really do, as I'm that way inclined myself. But you take it to a whole new level! I'm definitely seeing a trend in your recent posts... I'm not sure whether:

a) You don't think these things have been tested before, or

b) You have so much confidence in your powers of persuasion that you think you can convince public servants to side with you over the legislation (or binding precedent).

If it's the former, and I'm leaning towards that view, I can assure that it has been well tested. There are thousands of homeowners who've been in exactly the situation you outline, which is why the ATO has a specific policy outlining exactly how the situation is dealt with.

 

[kathryn d]

Perp
I will give you a true life example that we have just lived through.
We bought a 11 unit apartment building July 13,2005.The lenders insisted we repaired the roof, and those monies were withheld, and we had until Nov 1,2005 to have it completed.
This blew us over, because we had already gone unconditional on the purchase, have spent lots of money on Invironmental Impact, lawyers etc.
We agreed and the property was purchased.
In Canada, if you purchase a property knowing repairs will be need to be made, the cost of those repairs are added onto the building base.
Technically we knew when we purchased it, it was a repair. Our accountant at the time, included it our return as a repair, which was tax deductible expense. This was a $20K expense.Because it lowered my net income from my employed income, I was entitiled to full child tax benefits for our 3 dependant children, and I received all income tax I paid to be returned to me.
Go ahead to May 2008 and I am being audited by Revenue canada.
They state this was not a repair but a replacement. Everything was reversed and now I owe them lots (14k+) back.They still disagreed and we were deemed owing this.Payment now please !
Begging them not to garnish my wages, they promised to wait until after our Notice of Objection had finished. Finally after we were able to produce the invoice from the roof repair people, were we able to convince them, it was indeed just a repair and not a replacement.
By their laws, it shouldn't have mattered, and it should have been deemed added to base cost of the building.

So yes, I do think rules have interpretation. How you apply them and if you have a reasonable explanation as to why you should be able to apply it in your circumstance may sway them.
It may also need to go Notice of Objection (or whatever term you refer it to) which was free. If we had to appeal that decision, then it would have cost us.We probably wouldn't have appealed.

From your description, there would be no need to have an Appeals department, as everything has aleady been covered.
They have an Appeals dept, therefore they expect it to be used.

Your example doesn't mention what happens if you have taken the time to have a valid valuation done prior to moving is as a PPOR.

 

[Perp]

kathryn_d, whether something is a capital improvement or a repair can be a matter of interpretation. Whether you were PPOR then IP, or IP then PPOR, isn't, and the methods for apportioning capital growth in these situations are prescribed and not subjective. I know from asking the ATO that it's not only that you don't have to get a valuation when going IP > PPOR, but that you cannot use anything other than the method of apportioning by time.

So yes, I do think rules have interpretation. How you apply them and if you have a reasonable explanation as to why you should be able to apply it in your circumstance may sway them.

Yeeessss, if there are exceptional circumstances... but wanting to use a different method because it will result in a lower tax bill is highly unlikely to fly!

Your example doesn't mention what happens if you have taken the time to have a valid valuation done prior to moving is as a PPOR.

You are unable to use the valuation to apportion capital gains unless you go from PPOR > IP.

 

[Rob G.]

So yes, I do think rules have interpretation. How you apply them and if you have a reasonable explanation as to why you should be able to apply it in your circumstance may sway them.
It may also need to go Notice of Objection (or whatever term you refer it to) which was free. If we had to appeal that decision, then it would have cost us.We probably wouldn't have appealed.

From your description, there would be no need to have an Appeals department, as everything has aleady been covered.
They have an Appeals dept, therefore they expect it to be used.

Your example doesn't mention what happens if you have taken the time to have a valid valuation done prior to moving is as a PPOR.

No interpretation necessary:

Move into IP, s.118-185(2) ITAA97 apportion, no valuation.

Move out of PPOR that was 100% exempt and rent then you are taken to have acquired the dwelling at this time, s.118-192(2). You are taken to have acquired it at market value.

This is off the important topic that the property is no longer available for rental.

Cheers,

Rob

 

[kathryn d]

If we ever live through this situation, I will be sure to report in how we did.

To each, their own.
Good luck anyways.