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depreciation - am I getting it right

Discussion in 'Accounting & Tax' started by Logan, 30th Jun, 2015.

  1. Logan

    Logan Well-Known Member

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    Just want to make sure I have this right.

    I have been playing around with after tax cash flow figures. I am looking at two different houses one new, one over 40 years old. Using the 3 question online calculators I come up with 20K deductions on the new property in the first year then scaling back down but still pretty high in the first 10 years.

    The old house has about 3K of deductions.

    I know they would be added back if I sold so they are not 'real' deductions but they will certainly help my early cash flow.

    Do the above calculations sound right ? if so I can't work out why anyone would go for the old over the new if the properties are otherwise the same i.e. nearly the same street, same beds, baths, cars and both about the same rent - the new one maybe a bit more rent and just a bit higher price . Any ideas ?

    Thanks

    Logan
     
  2. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    The numbers may be right.

    The answer about why people would buy older homes over new homes varies but often, its value and/or potential.

    There does tend to be a premium on "new".

    Buying established creates options like the ability to add value (and boost cashflow) through renovation, may appeal to a wider rental market if renters in the area prefer to spend a bit less and are fine with an older place, can have superior cashflow (e.g. low buy price so low debt, but very similar rent is achieved to a new home) and lots more reasons.

    Everything I've purchased thus far needed to have the ability for me to add value in short-to-medium term so new stuff, despite the depreciation, doesn't suit my strategy at present.
     
  3. Logan

    Logan Well-Known Member

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    thanks Steven, I was just very surprised at the numbers and assumed I had made an error. I am high on equity at the moment and looking at relatively good growth areas, there seems to be a fair bit of infill new builds. I am also buying interstate with this purchase so I will have limited ability to oversee reno's which has been my sydney strategy
     
  4. Northy85

    Northy85 Well-Known Member

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    If you are holding long term get the new one. The old house will have maintenance issues from the get go. Cash flow wise you're way better off and you'll have less troubles getting good tenants.
     
  5. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    This is not necessarily true. It is only capital works deductions that affect the cost base and if the old house has only $3000 in deductions (in which case it must be a bit of a dive because we usually find about $1500-$2500 in the first year alone on an unrenovated place) then I would suggest most of these are not capital works but are instead plant and equipment. The latter will not affect your cost base.
     
  6. Logan

    Logan Well-Known Member

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    Just a clarification, I meant the cheap house will have about $3000 on it in the first year.

    In terms of capital works - do these relate to the fitting and fixtures or are you referring to the walls and base building etc.

    Initially I thought that all depreciation would have to be added to a cost base if you sold but now I am starting to think that it relates to capital works and not fitting, I might be making a mess of this. To make things simpler are you saying that depreciation you can claim on properties over 40 years old would NOT need to be added to a cost base if you sold ?

    Thanks

    logan
     
  7. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    The latter. Fixtures and fittings are officially known as plant and equipment. In general, capital works refers to construction and other elements that are difficult to remove, e.g., tiling. There's a bit of arbitrariness about these categorisations: you wouldn't think that kitchen cabinets (as capital works) would have a lifespan of 40 years but they do; you wouldn't think that ducted heating (as plant and equipment) would be a removable item but it is.

    Correct.

    Not necessarily: an older property may still have capital works deductions if there have been renovations or additions made that are capital in nature. Still, these will be minimal in most cases and you would be shooting yourself in the foot not to claim depreciation in order to avoid a tiny increase in CGT.

    Chris
     
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  8. MindMaster

    MindMaster Well-Known Member

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    I have depreciation schedules for a 40 year time frame. Is it possible to use depreciation over a shorter period ie 20 years?

    A shorter period would be much more useful for tax deductions in my current situation.
     
  9. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Are you asking whether the same total of deductions for the 40-year period could be condensed into 20 years?

    No. Depreciation has to be claimed over the mandated lifespans given by the ATO. Otherwise, I'm sure there are people who would benefit from condensing 40 years of depreciation into 1 year. It would be nice but, alas, too good to be true.

    Chris
     
  10. MindMaster

    MindMaster Well-Known Member

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    With depreciation you have a choice of prime cost or diminishing value. Is there also a choice with time period such as 20 years or is 40 years the only option?
     
  11. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    No. The reason it is 40 years is because that is the maximum lifespan of an asset (in this case, capital works). In all cases depreciation needs to be calculated based on the effective lives of the relevant assets.
     
  12. Northy85

    Northy85 Well-Known Member

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    Hi BMT, I have had a couple of houses done by you guys and I forgot how you come up with the amounts for deduction. Do you go by how much the residence is worth when the Depreciation schedule is written up for or is it how much is paid for the place?
     
  13. MindMaster

    MindMaster Well-Known Member

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    Thanks for your explanation BMT. Understanding an issue makes it much easier to deal with.
     
  14. Logan

    Logan Well-Known Member

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    Thanks Chris - if a property has been substantially renovated including the structure would the capital works almost be renewed again ? I am looking at a property now that is pretty close to a complete rebuild. There are just a few original windows and some of the original frame.
     
  15. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Northy, we use a combination of our powers as quantity surveyors (estimating construction cost and asset value) and tax agents (intimate knowledge of ATO rullings around depreciation) in order to find a maximum claimable value for you.

    For capital works (construction and other elements not easily removed) this has to mirror a reasonable cost for those assets in the year in which they were built (i.e., the same house built in 1990 would have drastically different capital works deductions than its 2010 twin).

    For plant and equipment (removable fixtures and fittings), if it's not a new construction then we can revalue these items and they start depreciating from the settlement date. These items have different lifespans and the value we put on them is not a re-sale or as-new value, but instead reflects their potential (as part of your overall purchase price) to last for their effective lives.

    Mostly. New assets are new assets. There'll be other elements that we probably won't be able to claim--say, if it doesn't have a new foundation--but we'll be able to make a pretty positive assessment of the place (the aim, of course, being to get you as many deductions as possible).

    Chris
     
  16. Northy85

    Northy85 Well-Known Member

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    Thanks Chris, that's good to know.
     
  17. HomeMinister

    HomeMinister Well-Known Member

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    Hi Chris from BMT can you help me. we acuired a an IP in June 2015 and did not do depreciation scheudule yet and now its new fiscal year. can we claim your cost as scheduler in the previous tax year? do you think its worth doing Schedule now for just 20 days of depreciation for last year i.e. 2014 to 2015 eofy. can you suggest?
     
  18. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    The fee for a depreciation schedule must be claimed in the year in which it is paid, so you would need to wait until June 2016 for that particular deduction.

    Yes, definitely. To start with, it doesn't matter when you order a depreciation schedule because those 20 days will be there for the claiming whether you order a report now or in two years. Whether you choose to claim them or not is up to you. Me? I'd do so. The clock starts ticking from purchase so you cannot defer these deductions.

    Furthermore, when it comes to partial first financial years, you'd be surprised at what we can find. The secret to this is low value items: depending on their value they can be written off straight away or added to a pool to accelerate their deductions.

    We published an article about this a few years ago here: http://www.bmtqs.com.au/Documents/publications/mav32.pdf

    Chris