Depreciation of a newly build house.

Hi,
Let say if I build a new house for 400k and then turn it into IP from day one.
I assume depreciation cost can't be as simple as 2.5% of 400k for X number of years, Since the items in the house has different depreciation life.

So do I get a surveyor to prepare the schedule? The surveyor would just estimate the cost price for each item which at the end could me more than the actual cost of building the house or could be less?

How does this actually work?. I assume when building a house the builder won't give you breakdown in cost of every item in the house?

 

The building costs will be partially for the building and partially for the fixtures and fittings.

 

You can ask the builder to provide a full schedule of costs. This won't tell you how to depreciate the different items on the list though. You would need advice for that but the builder can definitely provide the cost breakdown.

 

Is it compulsory to get builder to give a breakdown cost from ATO view? Or just get a surveyor to estimate.

 

If you can get actuals you should use them.

 

Costs can be actual (from invoices) or if invoices are not available a QS can estimate. You should get about $15K of depreciation in year 1 on a standard 4,2,2 brick veneer & tile home.

 

This is not tax advice. My understanding is you should use actual costs where they are known. You would only use an estimate where the actual construction expenditure is not known. An estimate should only be done by an appropriately qualified person including:-

· a quantity surveyor, who has expertise in the relevant type of construction;
· a clerk of works, such as a project organiser for major building projects;
· a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or
· a builder who is experienced in estimating construction costs of similar building projects.​

Legal database - View: Rulings: TR 97/25

 

Thanks All.

 

Does the 400k include the land? Land does not depreciate

 

Send the Builder's contract to the quantity surveyor.

2.5% of the entire project includes the land - epic fail.

 

The total cost of the build including professional fees, fencing, driveways etc is a great start. Builder rarely have a problem providing that.
The Assets in the property then need individual prices: appliances, floor coverings, blinds, HWS etc. You don't want the builder's price for these because it will have been a wholesale price and the reality is you paid the installed retail value for them. A QS can estimate the values with sufficient information.

 

It's not exactly the cost price, but an apportionment of value that reflects each asset's potential to produce income for you. Sound a bit vague? It is. But that's a good thing, in that it gives a QS some leeway. The ideal is that we find a good balance between assigning value to your fixtures and fittings (giving you great deductions in the early years) and to your actual construction (giving you a solid ongoing base of deductions).

In my experience, it's rare that a builder will give a full breakdown of costs. You might have an overall contract price in most cases with the values of a few of the extras. Depending on the builder, you might have a schedule of finishes/list of inclusions: i.e., an inventory of the fit-out, though it's rare that these include values.

Good question. In an ideal world (for the ATO, at least) this would happen, but it's rare that it does. The QS's position is that if costs are known, they need to be used. If costs are not known, the QS can make an estimate.

This example may highlight my previous point. Is the new house here one that was purchased outright or was it one where the owner engaged the builder to construct it? If the latter, that gives a QS a line in the sand where they are restricted to total values within the contract price. If the former, well, the purchase price doesn't necessarily reflect the construction cost. What if you bought the property cheaply as a distressed asset? Or, conversely, a very simple property in a prime location/market? There's more room to move here.

For this (hypothetical?) 4-2-2 house, what was the contract price if it was built? A deduction of $15k in the first year would be more easily achievable if it was purchased rather than built.

 

Yeah, you have to ask for it specifically. I have been told they will provide if you ask up front.

 

Yes, but you don't necessarily want their prices for the Assets. They will give you their cost price, which will be lower than the value of the item from a depreciation perspective.

 

Just more info to give to the quantity surveyor

 

Yes, I probably wasn't clear on this. What Depreciator says is entirely correct. Sometimes a bit of mystery is a good thing.