Hi all you seasoned veterans of investing…..can someone “please explain” in simple terms why depreciation of a rental property (3 bed house in our case) is refered to as “deferred” payment in relation to tax when selling the property in the future.
My wife and I are still unclear what all this means after reading and listening to Steve’s books etc..[blink][blink][blink][blink][blink][blink] and speaking to others about it…..please help!![blush2]warm regards to you all.
Boris & Elizabeth“Always have a plan B”
BBI’ll have a go at explaining it.
Any depreciation you have claimed on the building itself (not on the Fixtures and fittings within the building) must be deducted from the cost base when you are calculating your CGT. This increases the capital gain, so in effect you pay tax on this claimed amount when you sell.
Let’s say you buy a house built in 1990 to rent out. That house cost $100,000 to build (excluding fixtures and fittings: carpet, stove etc).
You can claim building depreciation at 2.5% per year = $2,500 pa.
So you own that house for 5 years and then sell it. You’ve claimed $12,500 along the way in building depreciation and you pay tax on this. (Remember, there is currently a 50% CGT discount if you hold a property longer than 1 year so you’ll be paying tax on half of this.)
Points to bear in mind:
– Depreciation on the fixtures and fittings often outweighs the depreciation on the building itself, certainly in the first 4-5 years.
– Any building purchased after May 1997 must have the eligible building depreciation deducted from the cost base upon sale whether you have claimed it or not. So you might as well claim it. Many accountants aren’t aware of this fact.
Hope this clears things up. I’ll be in office all this week, so if it’s still doesn’t make sense, feel free to call.
Scott
Tax Depreciation Schedules
Australia wide service
1300 660033
[email protected]
http://www.depreciator.com.auScott – Thank you for your input…understand what you are saying.
regards
Boris&ElizabethHi Scott
I asked this question on another thread before, I wonder if you could clarify the query for me.
“Any depreciation you have claimed on the building itself (not on the Fixtures and fittings within the building) must be deducted from the cost base when you are calculating your CGT. This increases the capital gain, so in effect you pay tax on this claimed amount when you sell.”
How about depreciation on Fixttures and fittings, eg hot water tank, do I have to deduct the depreciation for hot water tank from the cost base when I calculate the CGT. Does it means this will increase the capital gain and therefore I will have to pay tax on this claimed amount when I sell.
I appreciate your answer.
Regards,
Breakfree
Hi Breakfree,
Sorry, I saw that other post and forgot to reply to it.
As stated, depreciation claimed on the fixtures and fittings – hot water heater, appliances etc – don’t come into it.
A person on that other forum had something to say about this. I think he/she is an accountant and their name is MRY. They wrote something about it being important to have written-down values of assets in the contact of sale. I can’t for the life of me remember the exact point he was making.
I’ll see if I can find it again.
ScottTax Depreciation Schedules
Australia wide service
1300 660033
[email protected]
http://www.depreciator.com.auThanks Scott for such a prompt reply. You really clarify the issue for me.
It is a relief that I don’t have to pay tax on the depreciation I claim on fixtures and fittings .
Thanks again,
Breakfree
Correct me if I am wrong – but
If you don’t claim it, I think you still have to pay the same capital gains tax as if you do?
it’s not the ATO’s problem if you don’t claim it – they offer it to help private investors house tenants.
OOPS – Scott – you got to it first. Should have read your reply more closely.
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