I heard recently that when you claim depreciation on your rental property you have to pay this back when you sell the property? Is this correct? I'm seeing lots of conflicting viewpoints on this one!
Hi Tambo
You won't pay back anything on any of the Depreciation claimed however the Capital Allowance claimed will be deducted from the Cost Base on the original sale price when calculating Capital Gains.
Hope this helps.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Tambo,
My understanding is:
Depreciation applies to things that are installed but can be picked up and removed or replaced, such as air conditioners, kitchens, hot water systems… etc.
Capital allowance relates to fixed items like a carport, window, or the whole shell of the property.
As Richard mentions above, 'depreciation' can be claimed without affecting anything.
However, if you claim capital allowance then you deduct the amount claimed over the years from the original cost base (what you paid for the property initially). The result is your revised cost base, and is used for the purpose of calculating CGT.
For example,
Purchase price (original cost base): $200k
Capital allowance: $20k, deducted over X years
Revised cost base = 200-20 = $180k
Current Sale price: $250k
Capital gain = $250k – $180k = $70k
CGT would be calculated on the difference between the revised cost base and the current sale price, which in this example is $70k.
If you had not claimed capital allowance, CGT calculations would use your original cost base, so 250-200 = $50k.
What you have to weigh up is whether it's worth claiming capital allowance so you can see the benefit in your tax return every year, or whether you'd prefer to save on CGT when you sell… And which of those works out more cost effective for your situation.
Thankyou to you both for your great advice.
Makes perfect sense now. I have been stewing on this one for a while and thought what the heck, I'll ask the forum. My accountant knew very, very little about this, and I think I'll be getting a new one! Trouble is, living in the country makes it difficult.
Thanks!
These days you don't need to live near your accountant.
But getting one that knows what they are doing with investment properties is paramount. Can be the difference of thousands of dollars.
This is my new job! Finding a great accountant. You're right, you don't need to live near them, but how do you go about doing tax returns and whatever, do you just email back to and fro? I just want a good recommended accountant who is a specialist in investment properties.
My local solicitor was flabbergasted when I asked him to set up a trust to buy properties in. He thought the idea was not worth the paper it was written on. So, I also need a good solicitor who is experienced in working with property investors!
I am a solicitor and know a little bit about tax too. Located in Sydney
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry. Silly question I suppose, but can you use a solicitor who isn't local?
Depends what you want to use them for. Asking for help moving house may be tricky but advice may be ok.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
So if I bought a property it would be better to use a local solicitor to do the conveyancing? Doing contracts and organising settlement?
That's my problem, because I live in the country, the solicitors are quite old fashioned and don't really deal with property investors in the capacity that I need.
I can't see why you couldn't use a solicitor that's out of town. Like other professionals, you should be able to carry out most dealings via phone/email.
I was just cc'd into a solicitors email to one of my clients – the solicitor is based on the east coast whilst the client is based on the west coast. Hasn't stopped the transaction from proceeding smoothly.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Tambo,
Communication is key.
It doesn't really matter where your solicitor is, provided they are communicating effectively with yourself and other parties and can make themselves available for face to face meetings if/when required at the location required.
Even face to face meetings though don't always need to be held in your home town though. For example, settlement for a property purchased in Gladstone could be completed at the banks office in Brisbane… Lots of variables.
*Double post, deleted*
Generally for conveyancing matters solicitors just concentrate on the state they are located in, other than that you would probably want a more local solicitor if there is court appearances too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Jamie and Terry. It sounds like I can definitely get a trust set up through a solicitor out of town and leave the conveyancing to one who is more local. Thanks for your advice, I feel like I've got somewhere to go now.
Hi Tambo, I live in a regional area and have used city based solicitors and banker on all transactions. I have never met either of them face to face, but with email, pdf and scanning it all goes very smoothly. We have a great relationship and I save on petrol and parking! Works smoothly for me.
Couple years ago I was under the same impression why claim depreciation if i have to pay it back.
Yes I was wrong. At the time I think it was just Capital Works that effected your CGT stuff. Think it has now changed to be all depreciation.
I had a good chat with the guys at BMT Depreciation about it and claiming depreciation and they set the record straight. Since then I've had 12 reports done and have no worries about making use of the cashflow now.
I believe you have to make an allowance for it anyway in the CGT estimates later anyway, so what not claim it now is my view?
a tax deduction from your income is worth more than the CGT payable when you sell (if you sell) so yes whilst you will have to pay it back it will presumably be under the 50% CGT reduction, so half the value, plus the tiem value of money
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