Depreciation schedules are worth it

There is another possible reason to add to this which you will need to clarify as I'm a bit vague on it.

When calculating a capital gain from the sale of a rental property, the cost base of the asset is reduced by the amount of depreciation claimed. I have heard that the cost base is required to be reduced any depreciation that was eligible to be claimed, whether or not it was actually claimed. If that is true then people may as well claim for any eligible depreciation.

 

This is fundamentally correct and a massive mess in reality because obviously if you haven't been claiming it there are timing issues on amendments and the like.

Will throw in my 2c that depreciation schedules are very much worth it on the vast majority of investment properties. I would say that 99 out of 100 have more than paid for themselves after the first year and continue to do so from then on. Remembering that the actual cost of the report is fully deductible itself (so you're getting 48.5% of it back at the highest rate straight out).

There is the Capital Gains side of it with the Capital Works deduction reducing the cost base but given the discount on capital gains this is still a much better source of income to pay that piper on.

 

People,

Because I've never sold any IP before, I wonder what's the consequence in using depreciation schedule for the entire holding period ?

Do you have to pay greater or more Capital Gain tax on the IP using the Depreciation Report vs. the other that don't use Depreciation report ?

 

Read @Perthguy comment above.

 

But you should get CGT discount (owned more than a year). Hence claim $10 depreciation without actually spending $10, return real $5 (using simple 50% tax rate) as positive cash flow at the time. When selling, subtract cost base by $10 but at 50% CGT, then tax rate of 50% again, costs you $2.50. Haven't sold IP yet but cash flow is one positive I think.

 

it is only capital works deductions that are added back - depreciation on building

 

Here's another recent thread where the matter was dissected:

Depreciation Schedule for Dummies..

 

Hi looking for some assistance. I'm settling on a 70s house in a month and am wondering if it's worth me ordering a depreciation schedule now, as I'm looking to renovate in 6 months. It does have a semi renovated bathroom and new roof. Will I have to pay for a report on two seperate occasions... @Paul@PFI

 

If you are scrapping items, let Paul know and keep details/photos.

 

So basically the ATO demanded a tax return and worked out it owed people money

 

Ballpark $700.

 

This may be a stupid question but...........

When looking to purchase an IP do you get a QS report done before your purchase as part of due diligence?

or After purchase before first ATO lodgement?

 

The second option.

 

Nobody would charge you for two Dep Schedules. We have always updated them free of charge if people have the reno costs and I suspect by now most other companies would, too.
Scott

 

Ummm not quite but the statement is actually correct. The issue of add backs is different for a depreciable item. Thinking of it this very simplistic way. Lets assume the IP has a single depreciable asset. A HWS. It has a book value of $100 when IP is sold.

The capital proceeds for the CGT calc will be reduced by the written down value of the HWS ie $100 since the depreciable item is effectively disposed of. The effect of this calc claws back any depreciation previously claimed as a erosion of the cost base. When the laws were altered in 1996 for the add back of cap allowances it was intended to give equivalent balance to the treatment of depreciation. So factually speaking depreciation is clawed back. Its just not as obvious.

Its important that the residual value of depreciable items is deducted from CGT proceeds. Also the cost base of the property is separately reduced by value of cap allowances claimed. However its also important to :
1. Identify any depreciable items at sale date in schedule which no longer exist or have any effective life.
2. Ensure that any additions to the CGT cost base such as roof replacements, fencing, driveways etc are all factored into cost base if they aren't included n a depreciation report.