Depreciation after renovations

[RentMaster]

Hi AlexT

I would not expect you to need another chattels valuation.

When you did the renovations, you would have got receipts and invoices for the actual cost of the items. So that is the cost you use for depreciation purposes.

[whitt]

Alex T
Firstly congratulations on getting a Chattel valuation after purchase. Most investors forget this.Especially if they are going to reno, which makes it very hard later at tax time.


As rentmaster mentioned you will need to supply renovation costs, receipts etc..and dates to your accountant telling him eacatly what you have done.
He can then write off from Valuit's report anything replaced etc.. and include all the new things onto this years return.

Pretty straight forward for your accountant.

[AlexT]

I'm currently inputting all the receipts into my Rentmaster program. I'm sure it will add up to more than I expect :/

I have created and Interior Works & Exterior Works expense group where I put these receipts and this group is not a taxable expense. Does this sound right?
Also for little things like filler, masking tape, paint brushes, etc would these all be considered a renovating cost? It's easy grouping things like new carpet and kitchen as a capital expense, but all those little things add up a lot too!

[RentMaster]

Hi AlexT

I believe any expense under $500 can be expensed rather than depreciated. It is not worth depreciating a roll of masking tape. Althought if the masking tape is part of a larger renovation, I am not sure if you need to add the masking tape to the renovation costs, or if you can enter it as a separate item.

My accountant has previously told be that if you buy a $499 printer plus a ream of paper, then buy them on separate invoices, so they can both be expensed rather than depreciated. I think it is dependent on the size of the invoice.

[AlexT]

My accountant told me that $200 is the maximum limit for an expense rather than being depreciated. She mentioned that the IRD were thinking about increasing it to $500 but havn't yet.

[artemis]

Limit to expense rather than depreciate

My accountant told me that $200 is the maximum limit for an expense rather than being depreciated. She mentioned that the IRD were thinking about increasing it to $500 but havn't yet.

My accountant told me the same thing in the last few weeks. Seems to be some confusion about where this is at.

Just had a look on the IRD website, and (eventually) found the following:

"Assets costing $200 or less (including loose tools) may not need to be depreciated."

So I guess my accountant was correct ... until the rules change.

[CJ]

I think the increase to $500 is in the legislation going through the house at the moment. Cant remember if it was back dated to 1/4/05.

Incidently, i think technically it has to be on separate invoices and different days if from teh same shop. Otherwise you would just get people putting though purchases in lots of $200 ($500).

[artemis]

New tax legislation passed

Exerpts from article on the NBR's website today ...

"According to Revenue Minister Peter Dunne, a Bill passed last last night without opposition in Parliament will produce $1.1 billion in business tax cuts.
The Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Bill tweaks various tax laws ...

"The tax depreciation rules have been changed to encourage more productive use of capital by reducing biases in the rules that distort investment decisions. Most of the changes to the depreciation rules will apply from the 2005-06 income year.

"To reduce biases, depreciation rates for buildings have been lowered and the rates for short-life plant and equipment have been raised.

"The cost threshold that determines which assets must be accounted for on fixed asset registers has been raised from $200 to $500, which will reduce both the number of assets that must be accounted for and the number of tax adjustments required when a business disposes of an asset. The new threshold is effective from 19 May 2005, the date of the bill's introduction. ..."

http://www.nbr.co.nz/home/column_article.asp?id=14754&cid=4&cname=Business%20Today

[CJ]

"The cost threshold that determines which assets must be accounted for on fixed asset registers has been raised from $200 to $500, which will reduce both the number of assets that must be accounted for and the number of tax adjustments required when a business disposes of an asset. The new threshold is effective from 19 May 2005, the date of the bill's introduction. ..."

Sound about right (though it was the bills original introduction - it had to be re introduced for the new parliament.

So go back through you accounts and see if you can expense more things.

Be mindfull of this next time you go to the hardware shop. Can you split that purchase of a new bathroom over the 2 days of the weekend to keep both invoices under $500.

[AlexT]

Thanks for finding that article artemis, very timely.

Just to clarify, if I paid $400 for a new vanity to go into my rental property that I have just renovated before getting any tenants, can I expense the vanity rather than capitalizing it. (based on the new $500 limit)

I'm not sure whether you look at the cost, and expense anything under $500 or whether you look at the item for what it is, like a vanity, and say well "it is an asset" so I should captialize yet.

[CJ]

Even if it is an asset, to save admin costs they have set a minimum. So your $400 vanity will now be expensed (consider it as 100% Deprecation for low value assets.)

Imagine if there was no minimum, you would have to capitalise and depreciate a 10c screw!

Think of a lareg company with 1000's of assets, you dont want to be deprecating everything. Problem with large cos is that they buy in bulk so if they buy 100 computer keyboards at $50, they are all on the same invoice so have to capitalise each rather than being able to expense if they had bought separately.

[Re@der]

I am a little confused with asset and expense being used as the same thing. Would my $300 roof moss spray or my $1000 repaint be considered assets?

[AlexT]

Think of a large company with 1000's of assets, you dont want to be deprecating everything. Problem with large cos is that they buy in bulk so if they buy 100 computer keyboards at $50, they are all on the same invoice so have to capitalise each rather than being able to expense if they had bought separately.

So does that mean that the $500 limit is per invoice as opposed to per item? If a company had to buy 6000 screws at 10c on one invoice, would that then have to be capitalised?

[cube]

No, because screws are depreciable.

What the rule says is that you can't buy multiple items on one invoice and choose to depreciate some and not others.

So, if you buy e.g. a new machine for $2,000 and 6000 screws at 10c on the same invoice the you are, to coin a phrase, screwed!

Of course, I'm no accountant, and even my accountant is not exactly crystal clear on what is and isn't an expense (e.g. buying new carpet to replace worn out carpet - should be depreciated. Buying new carpet to replace unusable carpet (extensively damaged/stained/stinky beyond reasonable use) - expense (with original asset being written off).

go figure.

cube

[artemis]

Happy to be shown to be wrong, but I understand that any items you pay for before the property is let for the first time (by you) are capitalised and depreciated. They are regarded as improvements. Even if they are under $500 (pre $200). I went through this process last tax year, having bought a property which needed work before it could be let. I gathered all the invoices together in the category of capital expenditure, and my accountant concurred.

I replaced the carpet in the pre-rent period and the cost of the new carpet was capitalised, while the book value of the old one was written off. (Book value was as per the chattels valuation.)

On other occasions, where the property was already rented, I have replaced carpet and expensed it, even though the cost was greater than $200.