Who benefits from a LAQC?

[Spooky]

Hello, This is my first post and I'd like to say I've enjoyed reading the various threads for sometime now!

We have one negative geared property in a high capital gain area of the Northshore.

The Good News
Reg Valued at 255,000 in 2004
Purchased for $244,000
Renovations $35,000
Registered Valuation 3 months later in 2004 $355,000
Total Gain of Equity $76000 in 3 months
Excellent tennant, property manager, lawyer BUT

We were advised to refinance and shift all debt to the PI 100% including our private debt to maximise depreciation etc We have a IO mortgage on the pi and a very small floating mortgage on our private property ready for furcher purchasers.

We ran this past the accountant at formation of our LAQC he was ok with the " structure" We have a 90%, 10% holding respectively in the laqc

Bad News
We have just received our first full year tax credit and we are extremely disappointed.
Total TAX Credit $1590.88
Accontant Debit fees $1399.15
Total amount recieved $191.73 in our pocket! yeppeee
The accountant is now saying IRD only see the purchase price( which I've read recently on this forum} So Why couldnt he advise as of that at the beginning?

We intend to purchse positive geared propertys to balance our investment stragedy, including a minor dwelling on the current proprety we have,

Is there any point continuing a LAQC when the bottom line is "The only one benefiting is the accountant?
We would like a accountant who is more then a book keeper, Can give as sound advice,not only on dollars and cents, but property investment and when he says something he's true to his word.

Is there a acountant out there?
How do you quit a LAQC? Would you?
What would you do?
Find another accountant!

ps Does anyone know of a company that builds good quality minor dwellings that aren't garage companys?

Cheers thanks for reading my ramblings
Spooky

[SEIBU]

Spooky,

I'm not an accountant, but those figures look a bit low to me.

A few questions:

Do you have a breakdown of the purchase price into land value and house/chattel value
Also, what tax bracket are you in.
What are your costs per year - interest on loan, rates, insurance, maintenance etc
How much is the place renting for
Are you claiming depreciation on the chattels - carpet, stove etc

If you can get that info, we can do a basic calculation to check the figures.

re: minor dwellings, have you tried Kieran Trass' company, Hybrid?

SEIBU

[fudosan]

Hi Spooky,

A warm welcome to PT.

I can understand your frustration with your accountant. If you do find a good accountant, please let us know. I, and likely few more on this forum, would be interested in getting a good accountant as well. The following thread provides an intersting read.

Can you trust your Accountant?

http://www.propertytalk.com/forum/showthread.php?t=3880

[Spooky]

Hi, Heres some additional info,

Outgoings
Actual Monthly Mortgage payments IO for pi $2027.74

From laqc report
Interest on loan $14,453 ( I think this is calculated on the purchase price of pi}
Rates $1374.78( 6 payments of $229.13)
ARC 173.04 annual tax
Management fee 7% total $1180
Repairs/Maintenance $959
legal $ 406
insurance $234
general expenses $418
bank charges $44

less depreciation $5,380
depreciation recovered 155
net depreciation adjustment 5,225
net surplus $6537
There is a depreciation schedule of fix assets and depreciation.

Chattels, blinds, kitchen etc,stove,dishwasher..

The acct advised as it wasn't nessary to get a chattel valuation.
Yes we are claiming depreciation as above
I had the figures from laqc annual report looked over by another accountant and they are ok, However anyone knowledgable can make the figures stack up I guess. I have a gut feeling their too low...
Spooky

[SEIBU]

Hi Spooky,

By my calculation the property is renting out for about $325 per week.

$1180 in management fees at 7%
annual rental income is $1180/0.07 = $16857
which equates to $325-odd per week.

Assuming
a)the above
b) you're in the 19% tax bracket like me
c) using the interest figure of $14,453

then the numbers presented seem to stack up ok.

However, you said that your IO payments are now $2027.74 per month. That equates to $24,332.88 for a full year. Not sure how the $14,453 figure was arrived at. You are entitled to claim all interest against the IP.

I agree with the accountant that as far as depreciation is concerned, the original purchase price is used, plus cost of renovations - in your case $35,000. You should also check to see if he/she included that cost in the depreciation schedule.

I suspect a mistake has been made somewhere in the accounting, but I'd need a qualified accountant to back me up on that.

Hope you can make sense of this post.

Regards,
SEIBU

[Spooky]

Hi Seibu,
Thankyou for your feed back. What I actualy pay and what the accountant LAQC report dosn't match up,
unless I'm missing something?

I've check my LAQC Bank account and this is my rent after management fees, $1,326.60.
I top this up to cover the IO mortgage payment, around $840. I can confirm this is the total figure outgoing from my bank $2027.74 per month for IO mortgage of 369,000 ( incl transfer of private debt to pi}
I also pay rates , mower man and insurance on top of that! I'm on $49,000 a year before extras, so I know I'm on the 33% tax bracket

As you can see I'm a little concerned! Further information, The accountant strangely enough incorporated the laqc 3 weeks before end of the 2004 financial year, so we had to put a return in and we were out of pocket.
He appologized for making that mistake, he said next year 2005 will be a good one, ball park figure $10,000, We don't know if hes trying something on or weather he's over optismistic and gave as false expectations.

Thats why we prefer to find another accountant and hopefully a good one! or all the information I read on LAQC's is incorrect, I don't think so!

Cherrs for your help

Spooky

[Warren]

Spooky,

I have a couple of questions that I would like to ask to get some clarification so that I can give you some feedback on the depreciation side of things.

1. Please confirm that the accountant based the depreciation on the original purchase price of $244,000.

2. When you got the Registered Valuation in 2004 what was the Capital/ Market Value excluding chattels? $244,000? Also from this valuation what was the value of the land?

3. Approximately how old is the dwelling? What sort of condition was it in at the time of purchase? Original, partially refurbished, fully refurbished?

4. How did you arrive at the figures that you have used for the Stove, carpet etc? Where they figures that your accountant arrived at since you mention that you did NOT have a specialist chattel valuation/ depreciation apportionment completed?

5. The $35,000 of renovations that were completed. How did you arrive at this figure? Is this the contract price you paid to a builder or other contractor? Or; did you just pay for the materials and then a separate invoice for labour etc? Or some other means?

6. Broadly speaking what work was undertaken in the renovations?

Regards

[Julian]

Spooky,

I don't understand what you are saying or inferring when you say,
"Interest on loan $14, 453 (I think this is calculated on the purchase price of the pi)".

It is not "calculated" at all - it is merely the interest that you paid to the bank (as opposed to principal) on the loan for that particular property.

As for not getting a chattel valuation - that's nuts!

Julian

[mariner31]

So where are we at with all these depreciation rules now? Is it still all up in the air as it was before this forum moved to the new site?

Cheers.

[Spooky]

Hi Warren,

Thanks for your reply, here the info your asked for as best I can!

1/hmmm the accountant said depreciation was lower due to fact it can be only calculated on the original sale price or maybe I got that wrong, but he did say,
"original sale price explain a lower credit refund"

2/ 1st QV Reg Valuation beforce work commenced January 2004 Capital $230,000/Land $124,00/Market 254,000
2nd QV Reg Valuation after work completed April 2004/Capital $230,000/Land $124,000/Market 355,000

3/ Built 1960, tile roof/weather board bungalow 821 site, Rangitoto views.

4/ I rely on my accountant to provide services he gets paid for! I'm hopeless in the maths department. All figures supplied from 2005 LAQC report.
Accountants report. Schedule of Fixed Assets and Depreciation
e.g improvement kitchen cost price 6,994 book value 6,977 12.30% CP $76 ACCUM Depre 82 book value 6,767
e.g Chatetels> blinds drapes cost 3,094 book value 2992 additions on deposal 3,055 gain/loss $63

5/ I did most of the work myself ,after wk, weekends etc Timber, Paint etc Invoices from materials I purchased,
The Plumber/Sparky and kitchen installer, rubbish bin hire, floor sander for t&g floor, new hot water cylinder, shower,vanity, batts in ceiling, new ballastra on patio , drapes, power points/switchws, paint and materials
exterior paint, all invoices kept. Invoices from contracters carried labour, materials etc.

6/ as above


The bottom line is I can't understand Why our tax credit is so low?
My figures from monthly bank statement.
$1,326.60. rent after management fees a mth x 12 = $15919.20
$2027.74 per month mortage payment IO only 12 x $20227.74 =$24332.88
Minus 15919.20 from 20227.74 means I'm topping up the mortgage by $ 8413.68 plus Rates $1374.78 , Insurance as previously discussed.

I've read about Chattel Valuation, but one went with the "professional advice" in fact I repeated several times ,but was told we don't need to do a chattel valuation.

Thanks guys for you feed back so far......

[Warren]

Spooky,

Can you please double check the figures provided in the response to answer 2. I am after the figures from the valuation you had that was most recent at the time of purchase. This could be a Registered Valuation (RV) or the Government Valuation (GV) used for rating purposes.

I need as follows:

If RV
Market Value excluding chattels:
Land value:

IF QV
Capital Value:
Land Value:

Thanks

[Spooky]

Hi Warren, Thankyou for taking the time to work the maths out, heres the info you requested.

RV
Market Value excluding chattels:350,000
Land value:$210,000
Value of improvements $140,000

IF GV
Capital Value:$230,000
Land Value:$124,000
Value of Improvements $106,000
Date of Valuation 1/09/2002

thanks
Spooky

[SEIBU]

Also, it's probably a bit late to claim the extra interest this year, but remember to tally it up in 2006 - as well as that $1300 the accountant charged you. You should get a decent amount next year.

[Warren]

Spooky,

Thanks for all the details. The answers to my original questions are detailed below.

1. Where a property is being transferred from one entity to another, where there is a common ownership (as in this instance), the accountant must use the lower of the original purchase price or the transfer price. In this instance it is the purchase price. This is based on an IRD rule called the Associated Person rule.

2. Valuation details. We must use the most recent valuation , as at the time of purchase to breakdown the purchase price between the various categories e.g. land - does not depreciate, building structure - depreciates at 4% diminishing value (if purchased prior to 19 May 2005) and fit out and chattel items that depreciate anywhere between 7.5% and 50% diminishing value. In this instance I have used the QV details that you have provided.
"IF GV
Capital Value:$230,000
Land Value:$124,000
Value of Improvements $106,000
Date of Valuation 1/09/2002"

3. Age and condition of the dwelling effect how the $$$ are distributed amongst the various chattel etc items. As the house was built in the 1960's and you have spent a considerable sum on it I have assumed that it was in an original condition.

4. Given the basic numbers you have provided, and without inspecting the property I estimate that a specialist chattel valuation would have provided $5,800 in depreciation in the first year. To this you need to apply the tax rate etc. This would have provided you with some additional cash flow in the first year (your accountants figure is $5,380). This is even after our fee is taken into consideration (and our fee can normally be expensed as well!). Often the cost of a one off report from a chattel valuer will be more than cost effective taking into account the accountant’s hourly charge out rate to calculate these figures. The objective of a specialist chattel valuation is to maximise the depreciation. So what we are doing is claiming as much of the depreciation as we can in the earlier years - often when you need the cash flow - instead of claiming the depreciation over say 20 years. It is a timing issue.

5 & 6. Renovations. The chattel valuation is completed as at the purchase date and reflects the age, quality and conditions as at that date. Where a chattel valuation can be of additional benefit is where renovations or improvements are undertaken as all of the items are listed as per there IRD depreciation categories with individual values. As such your accountant can expense any items thrown away. Example - you replace the carpet as it is worn out. How does your accountant arrive at a value for the carpet?? Generally they estimate it. And when they do they tend to go low as they have no idea what it is worth (as it is not their occupation to know). This means that you cannot recover as much in the write off process so you are disadvantaged. A chattel valuation would give you an exact figure for the carpet. This is expensed out and the new carpet receipted in at the value you paid for it. Depreciation is then claimed on this new receipted value.

So, with the work that you have undertaken your accountant can include this based on the invoices you have provided. You can not claim for your time. Some things you can not claim depreciation on (paint, hire of floor sander), and others you will need to specify where it was used (e.g. timber), but others you can (HWC, shower, drapes) etc.

The short of it all. Would you have benefited from getting a chattel valuation completed? Yes (even from my bias point of view). We could have achieved slightly more $$ than your accountant and our cost to do it would have been $325 plus GST (What is your accountant’s hourly rate?). The real benefit probably comes from the fact that you were doing renovations so you would have had a full breakdown. Plus you could have used the list in the future, if needed, to minimise depreciation claw back when selling the property. Also if you are audited we can substantiate the figures we provided on everything as we have visited the property. Can your accountant?

Regards

[Warren]

So where are we at with all these depreciation rules now? Is it still all up in the air as it was before this forum moved to the new site?

Cheers.

The changes announced in the 2005 budget are outlined in a new bill entitled “The Taxation (Depreciation, Payment Dates Alignment, FBT and miscellaneous Provisions) Bill”. The Bill has not been passed into law due to the dissolution of the current Parliament for the election. The changes announced in the budget are not major but they are retrospective. What will happen with the Bill in the future depends on the new Government.

We have been endeavoring to get answers from IRD and the government on the correct use of depreciation rates for Property Investors for over two years. Although the 2005 budget has given us some direction it also leaves a lot up to the interpretation of individuals.

IRD did give some direction over a year ago as to how accountants should be handling the rates but the budget has added further confusion to this and accountants are interpreting the rules differently. We believe that the Policy Division of the IRD is looking to clarify the issue but we are unsure of their time frames.

Once we know what the situation is we will post it on PropertyTalk

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Alternatively we update subscribers in our monthly client newsletter. This is free to members of this forum. You can subscribe here to this on our website.

(Sorry Muppet for the "commercial nature" of the above).

Regards