Rewire claiming back cost

[rmikey5]

Hi I have three rental properties one of which is needing rewired got quotes between $4000 and $8000 if I got the property rewired would I be able to claim back 100% of the cost.

Thanks Michael.

[Learning Landlord]

Lesson the hard way...

Hi Michael

Well I am no expert but maybe I can help you re your particular question.

I have just ben through this (rewired rental properties) and had an unpleasant surprise. It seems that if you own a RENTAL property, AND it has or has previously had tenants in it (therefore IRD see it as a rental property), and it's FUTURE use is as a rental property, then you can claim certain work as repairs and maintenance.

However, rewiring a house is likely to be seen as Capital Expenditure which is claimed as 3% depreciation per year. Remember that you would have to pay the depreciation back to IRD if you sell the property and make a profit. (Which you likely will long term!).

Repairs and maintenance is normally more minor works (as my accountant explained to me). For instance, fixing burnt out wiring in one room may be 100% R and M claim, but rewiring the house would be Capital Deprec at 3% per year.

Be careful and get a property accountants advice. I wish I had. R and M I was hoping to claim were all put down as Cap Dep, so I lost out big time

Hope this helps...

[spaceman]

Repairs or improvements.

I have refurbished 3 of my properties.....and all have been R&M....without any arguements from either my accountant or the IRD.(Electrical rewiring was done in 1 property)

I was under the impression that the gotcha was improving the property.

That is if you just replace all of the existing wiring, it is undeniably R&M....... however if you add some new outlets and what not. You have improved the property and as such must depreciate the cost over time.

Cheers
Spaceman

[SuperDad]

Check this with your accountant.

Last night my accountant told a group of people that the test for whether something is capital expenditure or R+M is whether the works "significantly improve" the value of the property.

Does rewiring significantly improve the value of a property? I guess I would pay a bit more for a house that had been rewired and had new boards.

Paul.

[Learning Landlord]

Spaceman - could I have the name of your accountant lol!

I am really interested in your answer, as I say I have had to go CapDep instead of RM on work such as rewiring... Did IRD actually speak to you re this and clear it?

I think this is an area that a LOT of us 'newer' PI could benefit from.. If IRD audits, I do not want to have to supply a 'please explain!'

Why is it a 'grey' area when you claim $$ and 'set in stone' when you cant...

[Learning Landlord]

Back claiming R and M

Also, does anyone know if you have claimed Cap Dep in one tax year, can you resubmit expenses as R and M the following year? That would be useful information for those of us who have been stuck with a lousy 3% CD rate for the next xxx years...

[spaceman]

Grey schmey

Spaceman - could I have the name of your accountant lol!

I am really interested in your answer, as I say I have had to go CapDep instead of RM on work such as rewiring... Did IRD actually speak to you re this and clear it?

I think this is an area that a LOT of us 'newer' PI could benefit from.. If IRD audits, I do not want to have to supply a 'please explain!'

Why is it a 'grey' area when you claim $$ and 'set in stone' when you cant...

Accountants .....Whithers Tsang at the time....have now changed, but not for reasons related to any dissatisfaction with their service.

IRD didn't actually speak to me, but this all happened in the 2006/2007 tax year.......accounts were done for that year and a tax return filed, and I have heard nothing further............. I suppose it is technically possible that some evil IRD troll could be about to audit me and take issue with that tax return, but so far nothing.

It's pretty easy to argue that rewireing a has isn't an improvement, simply repairs and maintenance...........otherwise you wouldn't be able to replace anything in your IP as anything that is worn out is worth less than it's new replacement.

However claiming that the replacement of anything is an improvement is a less easy arguement........but one I'm sure the IRD and conservative accountants may like to argue.

The grey area perhaps comes as I said earlier.......if you add a few extra sockets and light switches when you do the rewiring......then it becomes a much easier task to argue for improvements and the need to depreciate. To get around this I would document the job very carefully and claim the exact replacements as R&M and depreciate any new bits and pieces.

As for arguing and set in stone ...... I weigh things up to where I'm prepared to argue long and hard.....right up to the point where it's going to start costing a lot either in accountants fee's or perhaps IRD/court battles and then I'll quite happily tuck my tail between my legs and take the cheapest way out.

A please explain letter from the IRd isn't the worst thing in the world has long as you have a solid reasoning behind your arguement......yes you can have you tax reassesed, but as long as your arguement is solid it would be hard for the IRD to acuse you of taking a abusive tax position.....get all airy fairy like claiming the GST on an IP as a trader and then not trading it but holding on to it....then all bets are off and you're asking for trouble.

Not sure about resubmitting expenses......try badgering the IRD until you get a sensible answer......It'll take a while, but won't cost you anything other than your time.......your accountant might be able to answer quicker, but it'll probably cost and it sounds like you'd have to convince your one to change their view.....possibly taking even longer than the IRD

You could try PM'ing HelenB apparently her bloke is one of the chief trolls she maybe prepared to ask him and post a response.

Cheers
Spaceman

[Rosco]

Repairs vs Asset

As mentioned earlier, the main test is whether the work done has significantly improved the value of the property. So cases are really obvious, and other are not. It also depends on what is done.

Generally a repair is fixing a part of something, it is NOT ripping out all the existing item and completely replacing it. This is NOT a repair, it is a replacement!

So with wiring, I'd argue if you completely replaced all the wiring, then its an Asset and should be depreciated.

Also, I would consider a house with all wiring replaced to be worth more than a house with old wiring.

Another example, if you replace a few planks of wood in the fence, it is obviously a repair. But if you rip down the whole fence and put up a new one, this isn't repairing it, its a whole new one, it would increase the value and it would definetly be an asset.

I agree with the wiring it is a bit more of a grey area, and there is no definete black and white answer.

With tax returns previously filed, some tax payers are lucky and the IRD never audits them. Others will get audited by IRD, then can face 100% + penalties and interest at 10% (was 14% until recently). If I was an auditor, and I saw $5,000 repairs for a property I would definetly be looking further!

When reviewing all our rental property accounts, this is an area I personally always review, as it is probably the number 1 area for mistakes and possilbe IRD trouble.

Ross

[DamonH]

How I understand it from what I have read. If you are improving the house above what it was like when you purchased it that is capital improvement. If you are improving the house back up to the state that it was when you purchased it, that is repairs and maintenance.

So to draw that to extremes, if you purchased the house brand new, then X years down the track you had to redo the wiring, that could be claimed as repairs as it is taking it back to the original state. But if, (like me) you purchased an old house that was run down and are replacing wiring as part of a renovation, then that is obviously capital improvement because it is making it better than when purchased.

They grey area is if you bought the house part way through the life time of the wiring then can you claim or not? I guess 'technically' you would have to look at how much the wiring had been depreciated at 3% since last time it was done and if it is totally depreciated it would be a capital expense but if it is not totally you 'could' claim against that value of it. More tricky than it is worth most likely.

Another way to look at it is if the wiring was no issue at all at the time of purchase, it was in good working order, then in the mean time it has become damaged or starting to show signs of deterioration, then you are simply putting it back to the state of purchase (good, safe working condition). But if you knew the wiring was worn or likely to need replacing at time of purchase then it would not be claimable.

With my project, I bought a run down place and am doing improvements so nearly all my expenses ($1000s) are not claimable because my aim is to improve the value of the house. There has been only a very few 'maintenance' claims like things that have broken and been repaired but are not part of the bigger renovation process (in fact some are more temporary fixes, like gate hinges or door locks, that are going to be totally removed in the long run.)

I have found it interesting that it has been commented that these insulation schemes can be claimed against but I struggle to see that as if the house had no insulation, putting it in is a capital improvement not maintenance.

[Jumpin]

I'm also looking at the cap depr vs R&M argument right now. I spent $1000 on a paint job giving a rental property interior a tidy up. Clearly R&M in my eyes. However, GRA put it in "improvements" category at depr 3% pa.

[revdev]

I've always worked on the principle that any one invoice over $500, made it's way into the dep schedule. Maybe that would explain it?

G

[Rosco]

The $500 rule is to stop low value assets being caitalised. So if you buy a oven for $499 including installation, it is clearly an asset, but as its under $500 you can claim 100% as if it was a repair.

For items over $500 you need to look at repair vs capital.

Jumpin, Painting is NOT an asset. Its just a repair as it does not substantial improve the value of the building. BUT if it was done on day one of purchase, then it is a cost of buying.

Ross