Property tax tips: calculating depreciation
When you purchase a property, how do you figure out what price you paid for the depreciable items (e.g. carpet, appliances etc)? There are a number of options.
Firstly you can specify it in the contract (for example, the purchase price of $450,000 includes $1,000 for appliances, $3,000 for carpets etc). You cannot dramatically over inflate the figures (e.g. say $20,000 for appliances and $30,000 for carpets) as this will not be accepted. In addition, the seller may have negative tax consequences from including these figures in the contract, so normally prices for depreciable items are not included in the contract. Also, a buyer may not be aware of all the items they can depreciate.
Secondly you can make your own reasonable estimate of the value of the assets included in the purchase price. The ATO says that any reasonable value should reflect the age and condition of the asset (i.e. if the stove was 15 years old, you cannot use a brand new replacement value as the estimate). The difficulty for most people is that they wouldn’t know everything that is available for depreciation and would miss some items if they did it themselves. Also if you are audited you run the risk that your own estimates will be highly scrutinised.
The third and most common option is to obtain an independent valuer to value the items purchased for the purposes of depreciation. The ATO has said they will accept reports from Quantity Surveyors as being satisfactory evidence for valuations. Depreciation is a complicated area and most people need the help of their accountant or a depreciation consultant to claim the correct amounts. At Momentum Wealth we always recommend using the services of a Quantity Surveyor.
Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.