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**RentMaster** · 30-01-2005, 08:27 PM

Yes I would recommend a chattels valuation, althought it might depend on the value fo your chattels. You say it is an older property, which means the chattels are older unless the place has been renovated with newer items. Newer items generally depreciate more than older ones.

**Gobbers** · 30-01-2005, 09:48 PM

Hi

I have only been in this game for a couple of years but have certainly found chattels valuations to be of benefit when in comes to tax time! We normally try and get agreed chattels values when purchasing but sometimes purchasers don't want to do so due to tax implications for themselves (especialy if the property was a rental for them) so the alternative is to get a valuation undertaken asap on taking posession. Perhaps if you have had the property for a while already then it might be a bit different in terms of benefit tax wise. The best time to do it would be at purchase time.

cheers

**Monid** · 31-01-2005, 07:30 AM

Hi Shar

I concur with your Accountant. Since the total amount depreciable shouldn't change with a chattels valuation, what you are really paying for is a change in the timing of the depreciation, you are bringing some of the money you get forward by increasing (in theory) the amount of chattels and decreasing the value of the structure of the house.

Personally I'm not keen on paying out money to change the timing of when other money arrives unless that other money is going to earn me more than I have spent. This seems unlikely so we don't get chattel valuations.

Cheers David

**RentMaster** · 31-01-2005, 09:51 AM

Let me provide you an example.

A property I purchased in 2001 was a brand new property, and so had all brand new chattels. I got a chattels valuation done and it came to 97k worth of chattels. If I had not got a chattels valuation, those items would have depreciated at 4%, which means I would have claimed $3880 in the first year. What I actually claimed was $11000. The valuation only cost me about $300 I think.

Of course in future years the depreciation will be less, but $1 today is worth more than that same $1 in 5 years time due to inflation. So the sooner you get your hands on it, the sooner you can get it working for you.

**Monid** · 31-01-2005, 11:10 AM

97K of Chattels!

How Many Ovens did it have?

Seriously, thanks for the example, this is the sort of time that a chattel valuation seems worthwhile to me. But as we generally don't buy new houses (Both for aesthetic and financial/investment reasons) and since we generally buy what could be generously referred to as cheapies...

A chattel valuation has never been likely to return us more money than it cost us (I figure this out by figuring how much the extra money we would get from the new valuation in terms of depreciation would earn us plonked in a long term deposit)

I am also somewhat philosophically loath to get depreciation early, its too tempting to spend it.

We view the money we get back from taxes through depreciation as house repair money, and it goes into our properties bank account until we need it to repair them with it...

**Shar** · 31-01-2005, 08:56 PM

Hi Guys

Thanks very much for your detailed replies. There seems to be divided opinion so I think I will need to read up about more about depreciation to understand it better!!

Shar

**Monid** · 01-02-2005, 08:44 AM

Making sure you understand it is always the best option Shar

I think (correct me if I'm wrong guys) that the rough conclusion of this thread has been get a chattel valuation if and only if it is likely to cover the cost of getting the valuation done in terms of the money that can be earned from the extra depreciation.

Cheers David

**Warren** · 01-02-2005, 10:27 AM

We find that in the majority of circumstances it is worthwhile having a chattel valuation completed for tax purposes.

What do we mean by worthwhile? You will receive more than our fee back in the first year in increased depreciation that you will be able to claim by having a full apportionment completed.

My accountant tells me that Chattels Valuations for claiming depreciation are probably only worthwhile for commercial or high value domestic properties owing to the cost of getting one done.

Not so. A couple of examples

1. A commercial warehouse that is literally a shell. We will find it hard to get sufficient increased depreciation out of. In this instance we talk to the investor over the options and other benefits of the chattel valuation.

2. True story. Property was purchased for approx $500,000 as an IP. We did not end up by doing a chattel valuation for this client as the land was worth $495,000 and the "outhouse" was worth the remaining $5,000.

What you need to consider is the proportion of the land from the Registered Valuation as a percentage of the Market/ Capital value. This has a large bearing on as to if a chattel valuation is worthwhile.

We normally try and get agreed chattels values when purchasing but sometimes purchasers don't want to do so due to tax implications for themselves (especially if the property was a rental for them

I would suggest that you should be careful in doing this in that you may be undervaluing the chattels and therefore not getting as much depreciation as you would have achieved if a specialist chattel valuation had been completed after purchase of the dwelling. On the upside you maybe overvaluing them and claiming depreciation on an amount higher than what we could achieve! However this means that we would then have less to distribute amongst the remaining chattels that do not have assigned values in the S&P agreement that may have higher depreciation rates. You need to consider the net overall effect.

Since the total amount depreciable shouldn't change with a chattels valuation, what you are really paying for is a change in the timing of the depreciation, you are bringing some of the money you get forward

What you are doing by having a chattel valuation is claiming the correct depreciation rate for that particular asset (as advised by the IRD). Lets take carpet as an example. By breaking the carpet out as a separate identifiable item, placing a specific value on the carpet, you are able to claim depreciation at 33% (diminishing value) giving an estimated life span of 5 years. (The longer the estimated life span the lower the depreciation rate). If the carpet had not been identified as a separate item depreciation could have still been claimed but possibly at 4% (estimated lifespan of 50 years) with the rest of the house. In effect what is happening is the depreciation reflects the approximate lifespan of the asset so that you can replace it when it wears out. The asset will depreciate to the same nominal value. In the case of carpet it is whether this happens over 5 years of 50 years.

The depreciation then reflects the expected lifespan of that particular specific item.

... by increasing (in theory) the amount of chattels and decreasing the value of the structure of the house.

We are not increasing chattels nor the value of the chattels but placing a value on the specific chattels purchased with the dwelling and that reflects their cost as a portion of the total purchase price of the dwelling. To do this we follow a couple of IRD formulas.

I'm not keen on paying out money to change the timing of when other money arrives unless that other money is going to earn me more than I have spent

As noted before we generally are able to increase the amount of depreciation that you are able to claim in the first year to the extent that the increased depreciation claimed is more than our fee. The subsequent years are a bonus for you. As Rentmaster has also point out there is the time value of money and also the increased cash flow in the first years when may IP's struggle to be +ive cf. A chattel valuation is the cream on the cake and can assist with a bit of cash flow earlier on.

Seriously, thanks for the example, this is the sort of time that a chattel valuation seems worthwhile to me

This is very typical of the outcomes we are able to achieve. Palmerston North may be a little different with lower purchase prices... but still the outcomes are very positive.

A chattel is not necessarily just an oven but can include pretty much everything from the letter box at the front gate, the concrete path to the front door, curtains, carpets, stoves, kitchen cabinets, bathroom fixtures, floor coverings, internal non-load bearing walls, TV aerial on the roof, the garden shed, to the back fence etc. (As per the IRD Tax guide).

we generally don't buy new houses (Both for aesthetic and financial/investment reasons) and since we generally buy what could be generously referred to as cheapies...

It does not matter the age of the house is, it comes down to the purchase price (which reflects, age, condition, location etc) which is effectively the market value. We have to apportion the purchase price over the entire property. There is an IRD formula that provides a breakdown of the purchase price between Land (does not depreciate), Building Structure (depreciates at 4%) and Chattels (depreciate anywhere between 7.5% and 50%). If this formula provides a sum of $50,000 for chattels we have to apportion this over all of the chattels - irrespective of age, condition etc. The key is to split this $50,000 so that it accurately reflects the age, condition etc of all of the chattels.

We view the money we get back from taxes through depreciation as house repair money,

This is exactly what it is for. Depreciation is a financial acknowledgement that the assets wear out over time and will need replacing.

There seems to be divided opinion so I think I will need to read up about more about depreciation to understand it better!!

Shar - feel free to contact me by Private Message or email ([email protected]). With some basic figures I will be able to tell you if it is going to me worthwhile getting as full report completed on your property in Palmerston North. Alternatively feel free to ring Alastair of our organisation who does the chattel valuations in Palmerston North (0508-482-583) to discuss the benefits.

I think (correct me if I'm wrong guys) that the rough conclusion of this thread has been get a chattel valuation if and only if it is likely to cover the cost of getting the valuation done in terms of the money that can be earned from the extra depreciation.

Generally the fee is not an issue as it is nominal (in our case $325 plus GST for a standard house) considering the overall benefits.

Other benefits include -

A full breakdown of chattels, their values and the IRD depreciation rates.

Reduced risk of penalties. This means if you are ever audited by the IRD you have substantiated values by a specialised independent third party (See our comment in the January 2005 edition of KPI in the Experts Forum)

Easy disposal of assets. If you ever replace an item you have an accurate book value that can be written off (as opposed to your accountant taking a (conservative) guess as to its value). The new chattel is depreciated at its receipted costs.

Minimise depreciation recovery. The report can be utilised to assist in minimising depreciation claw back when you sell the property.

Increased cash flow by maximising the depreciation you are able to claim.

Regards

**muppet** · 01-02-2005, 11:18 AM

Hi Warren

On behalf of PropertyTalk I would like to take this opportunity to thank you for the comprehensive answer to Shar's question about the viability of having a chattels valuation done.

Regards

**Julian** · 01-02-2005, 12:12 PM

Warren,
With regard to the example you cited with carpet (depreciable @ 33%) I understand that if the carpet (or anything else) was not specifically sheduled but was claimed with the building, then, come replacement time, the whole cost of the replaced carpet could be claimed as an expense vs capitalised and depreciated. If this is so, how do the numbers compare over time?
Julian.

**fudosan** · 01-02-2005, 01:30 PM

I had a situation where after a chattel valuation was done, I immediately replaced the old and damaged carpet in a room with a new one. My accountant just wrote off the old one completely as expense and capitalized the new one.

**kolzee** · 01-02-2005, 04:40 PM

Warren - you said

As noted before we generally are able to increase the amount of depreciation that you are able to claim in the first year to the extent that the increased depreciation claimed is more than our fee. The subsequent years are a bonus for you.

This is quite misleading as the comparison is not between the difference of depreciation but rather the time value of this amount. As all the depreciation claimed is likely to be repaid on sale, the benefit is the amount that can be made (time value) on the difference in depreciation figures.

The question then is whether this amount warrants paying the fee.

For a buy and hold property I think it generally does warrant the fee but the difference is crucial to those who do not fully understand and are trying to weigh up the choice themselves.

Unfortunately accountants frequently neglect explaining this.....

kolzee

**Warren** · 04-02-2005, 12:28 PM

Julian,

I have been giving your last post some thought.

I believe that it comes down to your accountants and the IRD interpretation of what is Repairs and Maintenance.

Now I am not an accountant but our general understanding is that what you are allowed to do (expense vs capitalise) depends on how much "renovation" and to what extent it is being undertaken. For example, if you purchased the dwelling new and then replaced the carpet then it could be considered a capital expense. If the dwelling was "second hand" and you replaced the carpet with new carpet, which puts it into a better condition than when you purchased the dwelling, then this is also capitalised. If you had put in second hand carpet then I believe it can be considered repairs and maintenance (I stand to be correct on this by any accountant who reads this if it is incorrect!).

This being the case the second part of the query as to how the numbers stack up and which approach you are better taking can not really be answered as the IRD defines how any "improvement" should be classified (capitalised vs R&M)

Kolzee

This is quite misleading as the comparison is not between the difference of depreciation but rather the time value of this amount.

Thank you for clarifying my point. You are quite correct. An asset can only depreciate by x amount.

Nether-the-less we do get more in depreciation than the average or most sophisticated investors will achieve if they had try to calculate the depreciation for themselves in the first year (Or if their accountant had tried to place values on all of the assets). Therefore working in the investor’s interest to maximise the depreciation and assisting the investor to get the additional cash flow from the property in the earlier years when the money is generally required more.

As all the depreciation claimed is likely to be repaid on sale, the benefit is the amount that can be made (time value) on the difference in depreciation figures.

Yes there is the issue of depreciation clawback. But not all of the depreciation has to be paid back. The key is to minimise that amount that you have to pay. One of the keys to this is being able to prove to the IRD that any increase in the property (between what you bought and sold at) has not been as a result of the carpet that is 15 years old going up in value. To do this you have to be able to prove what the value of the carpet was at the time you purchased the property and what the value of the carpet is at the time that you sold the property. There are also a number of other ways that can assist to minimise any clawback.

There is 2 points to note with the time value of money. I would rather have $7,000 now as it will buy an average car. In 20 years time it may only buy me a pretty fancy pushbike. So the first is buying power. The second issue is by having the money sooner rather than later and then having to pay it back on any clawback due is that has been an interest free loan from the Government ( I am sure there are plenty of students who would love an interest free student debt).

Regards

**kolzee** · 07-02-2005, 11:19 AM

Hi Warren,

Yup - i agree with your points. Don't get me wrong because i believe that in many cases it is worth getting a chattels valuation and especially if it is combined with good planning. Used well it is a great way to minimise tax.

My angst lingers from working for a big acctg firm where we frequently came across people sold on inappropriate tax schemes/techniques. The key problem in nearly all cases was that the issues weren't fully communicated to the client so they were often left high and dry....

Ironically though, i'll be needing a chattels valuation done in the next month or so!!!

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