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Depreciation question Kitchen in 1950's home

Discussion in 'Accounting & Tax' started by Gockie, 30th Jul, 2015.

  1. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Question for the Depreciators. I just bought a 1950's home , hasn't been tenanted yet and it needs updating. I am planning to update the kitchen. I was thinking I could do it after the first tenancy so I can claim the capital works deduction but I pulled this from the Commbank site (and I think it says more or less the same on the ATO website):

    The Australian Tax Office (ATO) allows you to claim capital works deductions for the construction costs of buildings, extensions, alterations (including kitchen and bathroom renovations) or structural improvements such as a gazebo, carport or retaining wall. The deductions are usually claimed at the rate of 2.5 per cent in the 40 years following construction, as materials such as bricks, concrete and windows are deemed to wear out slowly. Deductions can only be claimed if the property was built after 17 July 1985.

    So I guess this clearly says if my IP is a 1950's home then I won't be able to claim depreciation on the kitchen if I install a new one. Which means it won't really matter from a depreciation prespective if I install it now or in 6 month's time after the first tenants.

    Is that right or is there any depreciation benefit to be gained if I was to do it later or will the benefit be more or less immaterial and I should just go ahead with it now?
     
  2. drg86

    drg86 Well-Known Member

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    Getting a depreciation report done on my 1950's place now, so yes it can be done. I renovated the entire place and am able to claim the new fixtures and fittings. There is little to no depreciation on the original house itself (Edit: In my situation where the place was gutted and near everything is new)

    Some items depreciate at different rates. A house is 40 years but things like carpet, hot water system, appliances have a shorter life so are written off sooner. Think these can be depreciated each time they are replaced after the designated life span? Scott @Depreciator can you confirm?
     
    Last edited: 30th Jul, 2015
  3. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    For a start, the quote is way out of date because the 1985 date is irrelevant now. The cut-off is now the 15th/16th of September, 1987. However, the quote only applies to new constructions. If you add anything to a property, no matter how old that property is, then you'll be able to depreciate the new asset(s) in the majority of circumstances.

    Regardless of renovations, a depreciation schedule is in order because that quote you pulled from the CBA website only applies to capital works. Fixtures and fittings depreciate from your settlement date, making all but the most shabby, run-down properties a viable proposition for a depreciation schedule (and even in those cases you should get a preliminary estimate from a quantity surveyor).

    If someone told you that you can only claim new items on an old house then you have been fed the wrong information. For an older property not to be viable, you would have had to have owned it for more than about 5-7 years with no significant additions made since you bought it.
     
  4. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Thanks. Now if I buy a property with the intent to rent it out as soon as renovations are complete, to make it more rentable and to get a higher rent, can I claim the renovations done before the first tenancy as a deduction or only after it's become a rental property? I.e. after its been rented for ~6 months?
    I called your company about a week ago and I believe the answer I got was it could only be claimed if the works were done after it has become a rental (e.g. after its been rented for about 6 months). Does that sound right?
    I just found the info on the internet a bit confusing. Thanks. :)
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    One of the best schedules I have seen was a 150+ ? year old listed property in Parramatta that needed major structural restoration work. Sandstone craftsmen and shingles, handmade timber flooring replacements etc...The cost was around $800K to make it tenantable for a law firm.

    My tax advice to all investors is to always request a QS opinion and quote for your property and only when they tell you its not viable do you not proceed. All the major QS firms offer a fee concession that scales their fee back if they cant produce a viable result. Check the QS firm offers this.
     
  6. Depreciator

    Depreciator Moderator Staff Member

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    Gockie, you might have misunderstood what whoever you spoke to at BMT was saying. They know this stuff.
    If you buy a place and make structural improvements to it, you can start claiming on that work once you start renting out the property. You can't claim the work as 'repairs', but you can claim it at 2.5% - regardless of the age of the property.
    Any new Assets you add to the property you will claim more quickly from the first available to let date. You will also be able to claim on any existing Assets e.g. HWS, that you don't toss out as part of the reno.
     
  7. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Thanks Scott. So for clarity's sake. If I do the works now for the kitchen before it becomes a rental, is that depreciable?
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Gockie - The issue of claiming repairs after rental is true but often misinterpreted . It doesn't mean you should wait for tenancy then do it in a few months. Its means if you had it rented and a repair of damage (ie oven ceases to work) occurs its likely deductible. However renovations / capital expenses etc wont ever be a repair before or after tenancy.

    In your case, initial repairs (renovations, whatever you call it) are always non-deductible but will count towards a QS report and add to the cost base of the property. Better to get a schedule after works are complete. Its more than 2.5%...Plant & Equipment (ie kitchen appliances, garage motors, AC, HWS, lights, even door closers etc) have a shorter effective life.
     
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  9. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Appreciate all the input from you knowledgeable folk! If all the above is true (and I trust you lot), I don't know why the depreciator I spoke with on the phone advised me to renovate the kitchen in 6 months for the reasons of depreciation, unless I totally misunderstood what he said (but I dont think I did...)
     
  10. Depreciator

    Depreciator Moderator Staff Member

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    I reckon you might have misunderstood. This stuff is tricky on the phone. BMT know this stuff really well.
     
  11. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    It sounds like you're referring to what's commonly known as scrapping. As it stands, you'll be able to claim depreciation as usual on your renovations (once complete) + any qualifying assets that you've left in the house.

    Scrapping refers to an extra write-off for assets you dispose of during the renovations that were already being depreciated and, yes, you generally can only do this if those works were performed in the middle of a rental period, though the exact length of time as mandated by the ATO is unspecified. You could probably get away with less than six months before the works are performed.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If there is a value to scrap. A 1950s kitchen cant be scrapped. The oldest being a 1987 kitchen would have 30% of its historical cost left, at best (12 years x 2.5%). Example $3K kitchen cost back in 1987 x 30% = $1k to scrap.

    Typically the QS report wont show the kitchen as a separate capital works item and the QS should be consulted before work starts to identify that portion. And you cant use an accountants or self guestimate.
     
  13. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Thanks for the clarification BMT and everybody. It sounds like it would make sense. Ta :)
     
  14. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    What? I can't do a Fully Lucky?? Hehe
     
  15. drg86

    drg86 Well-Known Member

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    Yes am aware there is some value in the old house. Have edited post to clarify my situation was basically a new build and for me there was not much depreciation in 65 year old wall frames and a roof. I'm learning stuff this too :oops:
     
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  16. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Ah, but don't forget that any kitchen, no matter how old, will have an oven in it, and that can be scrapped. There might also be an exhaust fan, separate stove and range, possibly even a dishwasher (though that's unlikely in an old kitchen). It's not just capital works that can be scrapped but plant and equipment items too.

    As for the issue of being told six months? Well, I can't speak for my colleague. It may have been said but probably in the context of it being a "safe" period of time. The ATO doesn't make it easy when the wording of their tax ruling is "a period of time" and you'd have to get a private ruling for clarification (and if you don't have to draw attention to yourself, why would you?). In my experience six months would be more than enough time to qualify for a scrapping deduction.
     
  17. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Ta. There's no exhaust fan, separate stove and range, dishwasher. Its a very basic existing kitchen. It does have a reasonable kitchen sink! There's an upright cooker which is a combined cooktop and oven which is maybe 5-10 years old and that's the only thing in the kitchen I think is worth keeping.

    I can confirm that your colleague did say there was no hard and fast rule as to period of time and he said 6 months would be safe to be used to establish it as a rental property.
    Cheers.