Residential Investment Property and Depreciation: What is claimable and what is not.

Residential Investment Property and Depreciation: What is claimable and what is not.


Author: Michael Levertoff

Inland Revenue have made changes in the 2011-2012 income year to the way property is depreciated - so what does this mean for you as the owner of a rental?



In the 2010-2011 income year, you can claim depreciation on buildings – but not all fit-out costs previously claimed are claimable.



Sometimes different approaches have been taken in respect of the depreciation treatment of some items within a residential rental property.  For example, plumbing and piping, electrical wiring, internal walls, and doors. Inland Revenue considers that it is not correct to break down a residential rental property into such separate items for depreciation purposes. The approach to determine whether a particular item is part of or separate from the building, is to apply the following three-step test:



Step 1: Determine whether the item is in some way attached or connected to the building.  If the item is completely unattached, then it will not form a part of the building.  An item will not be considered attached for these purposes, if its only means of attachment is being plugged or wired into an electrical outlet (such as a freestanding oven), or attached to a water or gas outlet.  If the item is attached to the building, go to step 2.



Step 2: Determine whether the item is an integral part of the residential rental property such that a residential rental property would be considered incomplete or unable to function without the item.  If the item is an integral part of the residential rental property, then the item will be a part of the building.  If the item is not an integral part of the residential rental property, go to step 3.



Step 3: Determine whether the item is built-in or attached or connected to the building in such a way that it is part of the “fabric” of the building.  Consider factors such as the nature and degree of attachment, the difficulty involved in the item’s removal, and whether there would be any significant damage to the item or the building if the item were removed.  If the item is part of the fabric of the building, then it is part of the building for depreciation purposes.



It is best to seek advice if you think some of your fit-out costs not in the list below should be depreciated separately – we’ll look into this for you on a case-by-case basis.



However the following list is the approved list of depreciable items. Anything not on this list that you have claimed previously may need to be incorporated into the building cost and depreciated in accordance with building depreciation rates.

Appliances (small)

Bedding

Blinds

Carpets (modular nylon tile construction)

Carpets (other than modular nylon tile construction)

Compact disc players

Compact discs

Crockery

Curtains

Cutlery

Digital versatile disc players (DVD players)

Digital versatile discs (DVDs)

Dishwashers

Drapes

Dryers (clothes; domestic type)

Freezers (domestic type)

Furniture (fitted)

Furniture (loose)

Glassware

Heaters (electric)

Heaters (gas; fitted)

Heaters (gas; portable)

Integrated silk flower arrangements

Lawnmowers

Light fittings

Linen

Microwave ovens (domestic type)

Ovens (domestic type)

Paintings and drawings - in either case being property the value of which might reasonably be expected in normal circumstances to decline in value

Prints (including limited edition prints)

Refrigerators (domestic type)

Residential rental property chattels (default class)

Stereos

Stoves (domestic type)

Televisions

Utensils (including pots and pans)

Vacuum cleaners (domestic type)

Video game discs

Video game players

Video recorders

Vinyl flooring

Washing machines (domestic type)

Water heaters

In the 2011-2012 income year, the depreciation rate for buildings with an estimated useful life of 50 years or more reduces to 0%.



The above chattels can still be depreciated in accordance with Inland Revenue’s published rates.



What does this mean?

Because some of the items you have depreciated in the past are no longer allowable, your property may not be negatively geared – you may have a tax bill to pay at the end of the tax year. Certainly, losses will be diminished. This is important to consider if you are relying on tax refunds generated through losses in previous tax years.



If you’re concerned, contact the office and we’ll do a quick assessment for you for a one-off fee of $125+GST per property which will guide you in the likely tax position of each of your properties. This will help your decision making process – including considering selling up or restructuring if necessary.

If you need further assistance please Ask a question.