All Topics / The Treasure Chest / Capital improvement or repair ? Hypotheticals

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  • Profile photo of hwd007hwd007
    Member
    @hwd007
    Join Date: 2002
    Post Count: 247

    I have a few hypothetical scenarios about capital improvement.

    Is removing a wall for personal taste and then tidying up the mess a capital improvement or a repair ? I mean you are subtracting material from the properties capital, that had an input cost. Then you are tidying up or repairing the wall with input capital of lesser cash value, than the value of material originally installed.

    Any capital improvement then surely becomes perceptual, as technically you have actually subtracted from the capital material value of the property.

    To further demonstrate this point somewhat conversely, say I knocked down all internal walls and removed the material from the premises and dumped it at the local tip. Then say I replaced all these walls with window sliding doors and blinds that actually cost more than the walls. Now perceptually, one could argue that we have now devalued the premises. Most of us would likely agree with that. Who wants sliding glass doors with blinds, as walls ? But then they cost more to install so I guess we have added capital inputs over capital outputs. You get the point. So where do we stand ?

    I guess it comes to the question of what constitutes capital improvement ? is it the value of inputs contained within the buildings structure, or is it the market value as a result of change to the premises ?

    Another example, say we completely demolished a smaller study with building fixtures, desk etc… that had an input current capital value of $6000 and spent $5,000 converting it into a larger extra bed room ( basically just 4 walls and a door ) . Now is that a capital improvement ? Some people like studies and some like bedrooms. Capital Inputs are now less than before. So what is it assessed on ?

    1. intent ? i.e. desire to improve percieved value

    2. inputs vs outputs ? i.e capital value of materials removed against materials installed.

    3. results ? i.e. unit now rents for more or less as a direct result of the modification to the buildling structure regardless of cost

    4. any combination of the above ?

    5. none of the above ?

    Just thought I would throw in a curly one for all you property accountants.

    [;)]

    Profile photo of Stuart WemyssStuart Wemyss
    Member
    @stuart-wemyss
    Join Date: 2003
    Post Count: 598

    Wow hwdoo7. This is a 2+ hour accounting lecture (and debate). There are heaps of Tax Rulings and Case Law on this one. I suggest you have a search around on the ATO website (and speak with a knowledgeable professional).

    I must admit that it’s something I studied over 3 years ago so I am only just familiar with the general principals.

    Cheers

    Stu

    Property & Finance News
    at http://www.prosolution.com.au

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hi,

    Just leaving so I need to be quick…

    Generally speaking, if you replace one item with another of comparable quality then it is OK to say it is a repair (100% deduction).

    But… if you make an upgrade then it is a replacement (depreciate where possible).

    My first glance thoughts on:

    1. Replacing a wall… structural, not deductible – add to the cost base of the house.

    2. Repairing a wall (replatering, painting with same kind of paint, recarpeting with same type and quality of floor fixture)… repair, deductible.

    3. Re: replacing walls with sliding doors – as you are not replacing walls with walls of a similar kind… structural as per 1 above.

    It doesn’t matter whether the change adds to or decreases from the possible sales price. They are independent events compared with deductibility.

    4. Study to bedroom… change again, so unless you just replaced what you took out with the same kind of material, then sorry, no deduction.

    Inputs, outputs, more rent, less rent… it all doesn’t really matter. The basis is whether or not it is a repair (deductible) or a replacement with an improvement (possibly depreciable, if not, add to the cost of your property).

    Of course, matters such as this should be discussed with your accountant… and it would be wise to follow Stu’s advice re: chasing up the ATO position.

    Bye,

    Steve McKnight

    **********
    Remember that success comes from doing things differently.
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    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

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