Our question of the week comes from Rita who asks about depreciation on a cosmetic renovation and if she needs to replace her existing schedule or just add to it. In today’s show Brad Beer, our tax depreciation expert from BMT Tax Depreciation, joins us.
Kevin: As I said at the start of the show, we had a question – and a good question – from Rita, who writes and asks a question about tax depreciation:
“I had a depreciation schedule done about 10 years ago for my investment property, which is now 12 years old. I’ve just done a cosmetic renovation, replacing the original carpets and blinds and adding new fencing. I’m also doing other repairs and maintenance, like painting and floor sanding. Do I need to get a new depreciation report done, or do I just give my tax accountant a list of the costs and let him work out the items and add the depreciation schedule, which ones to claim as repairs?”
Thanks for that question, Rita. I imagine a few people would probably want to know the answer to this. Brad Beer, our tax depreciation expert, joins us from BMT Tax Depreciation.
Brad: Hi, Kevin.
Kevin: What would you say there to Rita?
Brad: Look, Rita, Kevin, it is a good question, and it’s a regular-type question. Now that’s a very specific one about what to do in a renovation, but let’s address that one and some of the other things for people who are doing slightly different renovations.
Simply, if you had a depreciation schedule done on the actual property that you purchased 10 years ago, the things that relate to the claims on the building and the things in there don’t actually change. Now when you change things, you change what is there to claim. But the original building is still depreciating, so you’re still using that original depreciation schedule, yes.
When you do a renovation, obviously, you change things. You change the cost of what is there, so you change the things that are able to be depreciated. Those things that you have done there are mostly cosmetic – a carpet, blinds. For simple things like that, you have a cost, so yes, your accountant should be able to apply the correct rate to those things and make deductions for those things going forward.
For fencing, once again, a new fence is a capital improvement that will need to depreciate, and you have the cost of that fence, so the quantity surveyor doesn’t need to come and tell you how much that fence costs. Your accountant should be able to apply the correct rates.
Some of those other things and other work that are done sometimes that are repairs and maintenance, generally, your accountant will be able to make a decision as to whether they should be added to a depreciation schedule and claimed if they’re a capital improvement or actually claimed as repairs and maintenance if they’re repairs and maintenance.
Accountants often have different ideas of what things they would like to claim. It gets a bit specific about that, and we can help with that. But normally, we work alongside the accountant. As a quantity surveyor, we’re the cost guy who comes up with the costs. If you have all the costs, sometimes we don’t need to get involved in that because it’s generally fairly simple for your accountant to work out.
There’s a fair bit of work done here, but they’re fairly simple items. If you do a major renovation and you rip it apart, it’s good to probably see the quantity surveyor about that so that they can make sure they do split up the costs properly and identify all the correct plant and equipment items and maximize the deduction going forward. That, obviously, is very important because that’s what as an investor you’re after doing.
One other thing I’d like to add, Kevin, is making sure that when you do do renovations that you do take advantage of making sure you have claimed everything on the items that were there already, and if you haven’t claimed it all and you scrap those items, make sure you claim that scrapping allowance on them.
Kevin: Yes. That’s what I was going to ask you about – scrapping and whether or not any of the items that Rita mentioned there would allow her to do that, Brad.
Brad: She’s had a property there for 10 years. Some of those things, their actual effective life, may have actually finished, and she may have actually claimed all the deductions. But if there is anything left on the carpet or anything there… Now the fencing is a very interesting one because the fencing, if it’s only 12 years old, you should have a scrapping allowance related to that existing fencing. It depends on whether there is any value.
Your original depreciation schedule should show the value that may be left on any carpets, blinds, or planned equipment items, and it’s simple; your accountant can adjust that. If you’ve ripped out fencing and things that are 12 years old, then you have to potentially get them to give you a bit of help to split some of those costs out. But yes, it can be done. Definitely, scrapping is something to consider whenever you do a renovation.
Kevin: Yes. Some of the points you’ve raised here would indicate to me that probably Rita is better off getting another schedule done, especially after 10 or 12 years. You think it wouldn’t hurt to go back and refresh it all, Brad, anyway.
Brad: I guess the misunderstanding there is it’s not necessarily a new schedule; it’s an adjustment to the existing schedule.
Kevin: An update, yes.
Brad: It’s best to have whoever did that schedule in the first place, make sure you talk to them and the accountant about this thing and make sure you do get it right.
Kevin: Very good advice from Brad Beer at BMT Tax Depreciation. There’s a button on our home page, too, if you want more information there.
Brad, thanks for your time.
Brad: Thanks, Kevin.
Kevin: I want to congratulate Rita. Rita, you are our question of the week, and as such, you get to win a 12-month subscription to Australian Property Investor magazine. Congratulations. We’ll be in touch to get your address, and we’ll get it out to you.
Keep those questions coming in, too. Do it through the website on the Ask Our Experts button, or send me an e-mail direct to Kevin@RealEstateTalk.com.au.