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Depreciation Schedule for Dummies..

Discussion in 'Accounting & Tax' started by Matty77, 20th Oct, 2015.

  1. Matty77

    Matty77 Active Member

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    A couple of quick questions which I searched and cant find the answer for on here..

    I have just had a depreciation schedule done on my house which is going to be rented, so in laymans terms if it says depreciation over years 1 to 21 of approx 200k does that mean I would save approx 30% (say average taxable income) so that would be about $60k savings over 21 years? (in real simplistic terms?

    Second question, I have rented my house out in Adelaide for the past 4 years, didn't get a depreciation schedule done on it, approx 20 years old. We are moving back into the house in Dec so can/should I get a depreciation schedule done before we move back in so we can back claim? Can you back claim? Do I have to get it done before we move back in and turn it into our PPOR again?

    Thanks in advance.
     
  2. Greyghost

    Greyghost Well-Known Member

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    Whatever you claim as depreciation is then deducted off the cost base of the asset when it's sold for capital gains tax purposes. Can't double dip!
     
  3. Depreciator

    Depreciator Moderator Staff Member

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    The add back applies to depreciation claimed on the building, not the Assets.
    Matty, wait to you move back in and get in touch with me or someone else for a ballpark depreciation figure. Then see what your accountant reckons. It might not be worth pursuing.

    Scott
     
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  4. pinkboy

    pinkboy Well-Known Member Premium Member

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    For a moment, from the title, I thought fullylucky had started a book series......

    pinkboy
     
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  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    In the long run the cashflow value of depreciation deductions are as follows:
    1. Annually, at your marginal tax rate/s the value of annual depn and cap allowance deductions
    2. Scrapping - Some deductions may be bought forward from the scheduled dates for deductions if the item is scrapped / obsolete or replaced.
    3. Replacement items acquired after the report would also become depreciable etc. The tax agent may assist with that.

    If the IP is never sold yes 30% x the depreciable value (over 40 years).

    So cost of report say $700. Cashflow value over 40 years maybe $60K. That's a winner in my book.

    Greyghost raises a point that many also get very wrong. When the property is sold there is a clawback for the depreciation / cap allowance deductions claimed to that time. This reduces the cost base and therefore increases CGT. But the increase will be 50cents in the dollar. So you are always 50% better off. Using example above the gross CGT profit would be $200K higher. Only $100K taxed. Extra $35K CGT to pay v's $60K in enhanced refunds. You still better off !!

    Also this view that the costbase adjustment is fully clawed back is just not right. Typically growth applies more to land than buildings. So the valuation change generally has outpaced the depreciable losses over time. I recall a QS firm did that historical analysis in a technical tax paper that compared a person who chose not to claim based on this notion - Interesting. They looked at 15 years and compared the two scenario's. Wish I could recall it.
     
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  6. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Great post, Paul. I'm hearing a lot of concern about depreciation vs. CGT from potential clients, sometimes even those who have specifically been told by their accountants to talk to us!

    A little bit of maths always seems to set them straight but they often still sound nervous. I suppose it's only natural that, with the rise in property value in many locations, CGT would have the Chicken Littles rushing around looking up at the sky.
     
  7. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Cashflow wins everytime.

    $1 in today's pocket is better than a possible $1 in 20 years.

    Same reason why I encourage some large refund taxpayers to do a conservative PAYG variation. The Commonwealth Govt don't invest it well enough.
     
  8. Matty77

    Matty77 Active Member

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    Thanks everyone, great info and answered my question. ;)
     
  9. Northy85

    Northy85 Well-Known Member

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    You'd want to be careful selling something you bought brand new then unless it has gone up significantly, as you would have claimed a fair wack of deductions and could potentially be selling at a loss. I remember Margret Lomas talking about a unit she bought in Cairns that has grown maybe $50k or something in 15 years, she would be in negative equity if she were to sell because of the deprecation claimed.