13 Dec The facts about tax benefits on replacement items – Ed Chan
Ed Chan joins us to answer a question from Robyn. She is confused about some conflicting advice on the available tax benefits on replaced items in an investment property.
Kevin: We’re going to answer a question on the show now that came in from Robyn. Thanks for the question. And by the way, keep those questions coming in; just send them in through the website. Ed Chan is going to answer this question for us. Hi, Ed.
Thank you for joining us in the show.
Ed: Hi, Kevin. Thanks for having me.
Kevin: Ed Chan, of course, from Chan & Naylor. The e-mail question from Robyn says, “Thank you for a wonderful show. I’ve been listening for a number of years and have gained an enormous amount of knowledge.” Thank you, Robyn. We really appreciate your feedback.
Robyn says that she has replaced a number of items in her rental property this year, 2015–2016, held in her own personal name. She understood from our program that she could claim up to $800 as an example – it was a couple who owned the property together, tenants in common – yet her accountant says that she can only climb up to $300 and others have to be depreciated. Can we please help?
Robyn, we will. We’ll ask that question of Ed Chan.
Ed, what would be your answer to Robyn?
Ed: I’m not familiar with the $800 limit that you made reference to. When you spend money on a property, it’s generally to bring the property back to what its original conditions were, and it falls into two categories. It’s either repairs and maintenance or it’s capital.
If it’s repairs and maintenance, it’s allowed fully as a tax deduction. The definition of repairs and maintenance is to replace what was there with a similar material. For example, it was a wooden fence and you replaced it with another wooden fence; that’s deemed a repair, so it’s 100% deductible.
However, if you improve the fence from a wooden fence to a brick fence, then that’s an improvement on what you had before, and that constitutes a capital improvement. With capital improvements, you can only depreciate the item, and the depreciation rates range between 2.5% to about 30%. Over a five-year period, you’ll be able to claim the whole lot back.
Kevin: There you go, Robyn. I hope that’s clarified for you. I’m sure it has.
Ed Chan from Chan & Naylor, thank you so much for your time. It’s always great to have you on the show. Thanks, mate.
Ed: Thanks for having me, Kevin.