With recent floods causing devastation throughout Queensland and Victoria, many people with investment properties have been left wondering what will happen with their depreciation and capital allowance claim after the clean up.
Property depreciation is a tax deduction available to the owner of an investment property for the wear and tear on the fixtures in their property. This includes things like carpets, stoves, blinds, heaters, light shades and hot water systems.
There is also a deduction available for the wear and tear on the structural element of a building, this is called building write off.
But what happens when there is a flood and assets are destroyed? For those lucky enough to be insured for flood damage the damaged items are replaced with insurance, for everyone else an out-of-pocket expense is the only solution.
Bradley Beer, Director of BMT Tax Depreciation said that the removal and replacement of certain assets or parts of the home will create an extra deduction depending on whether insurance was actioned.
So when an item is scrapped/thrown out and replaced without an insurance claim, the leftover value of that asset can be written off immediately and the new asset replacing the old one can start to be depreciated and claimed.
There can often be thousands of dollars left in these assets that can be written off and claimed immediately creating valuable cash flow for the property owner.
If an insurance claim is taking place, fixtures, fittings and structural components that have been damaged and removed cannot be written off or continue to be claimed. When the item is removed the insurance company becomes the owner.
However the new replaced items become the property owner's and these can be depreciated and claimed.
The following example explains how this can work:
Scenario
Existing air conditioner - bought in 2008 for $1,000 - the owner has claimed approximately $500, depreciating it down to $500 in 2011. It is completely destroyed and rendered useless after being affected by flood waters.
Case 1 - The insurance company pays the full amount for new $1000 air conditioner:
The property owner cannot claim any more of the $500 remaining in old air conditioner; however they can start depreciating the new air conditioner from the installation date.
Case 2 - The item was not insured - the new air conditioner was paid for by the owner in full costing $1000:
The property owner can claim the existing $500 left on the old air conditioner, they can also start depreciating the new air conditioner from the installation date.
It is important to discuss your situation with your accountant and a qualified quantity surveyor like BMT Tax Depreciation to ensure you are getting something back for your loss during these devastating floods.
For any further information please contact BMT Tax Depreciation on 1300 728 726.
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