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Can property be too old to be depreciated?

February 9, 2017

There have been a lot of occasions where my clients asked me this question: "My property is 50+ years old, isn't it too old to claim depreciation of it?"

 

My initial answer will be yes and no. Yes, because for residential property built before 18 July 1985, there is no depreciation you can claim for it.

 

However, the important thing to note is my 'no' answer. For any improvements done to the house post 1985 all the way to when you purchase the property, you are entitled to claim deductions on wear and tear (depreciation) of these improvements.

 

When I do inspection of your investment property, we will identify any improvements done to the property post construction that may have been done by previous owner(s). I will liaise with local council for history of the house and estimate the cost of any improvements done to the house. These cost will then added to depreciation report after being assigned for either Division 43 or Division 40 deductions.

 

Let's take an example of 60 years old house below:

 

Initially, it looks like there is no value can be depreciated of this house at all.

 

After inspection, I identify that the internal ceiling of the house doesn't look as old as the house, the bathroom design definitely post 2000, there are walls that are new to create a new rooms at the side of house. On top of that internally, the house is freshly painted pre-purchased.

 

After consulting with previous owner and council, I noted there are $30,000 improvements done to the house post 2010. On top of that, there are improvements post 1998 which we estimate for about $40,000 spent between 1998-2010 which we incorporated to the house. These two improvements alone accounts for $70,000 improvements added to the depreciation schedule.

 

I then distribute the cost to different assets effective life and I identified the capital works of the building from the $70,000 total. The owner ends up able to claim about $4000 of deductions yearly for the next 3 years, then it goes down to $2000-3000 for the next 5 years after.

 

Let's take the first year $4000 alone. Assuming the income tax rate of the owner is 37%, the depreciation translated to $1480 extra cash in his/her first year tax return. This is almost triple of the fees he paid to get depreciation schedule done.

 

From this case study I summarised that investment property owner should never underestimate the value of their old house. Contact our Quantity Surveyor today if you're unsure whether your old house still worth of any depreciation or not. You will be amaze how much value left in your investment property.

 

 

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