Property management involves a lot of risk, and at Auckland Property Management our focus is on risk reduction strategies for our owners. Part of this service includes monthly property investment seminars on topics of interest to our clients.
Our third property investment seminar of 2019 held on Thursday 20th June was a great success with attendees representing both current clients and private property investors.
We had two wonderful speakers present on the night, and a brief summary of their presentations follows.
Galina Bell, Tax Principal, RSM New Zealand
To start the evening, Galina Bell from RSM New Zealand, covered rental deductions and depreciation. Galina is a Tax Principal based at the Auckland office of RSM and specialises in providing tax advice to both national and international clients.
Galina started off with residential rental deduction allowances and the pertinent questions for investors to ask such as what is your business structure and property valuation? Are your total deductions under $10’000? and how long has the property been rented for? Another factor for investors to determine is whether the property expenditure (under repairs and maintenance) is deductible, depreciable or neither.
What is depreciation, and when is it allowed as a deduction?
The depreciation is an accounting method that allows a deduction for the cost of a capital asset spread over the useful life of the asset. The deduction is a portion of the cost of the asset over its life calculated at a rate prescribed for the asset. The depreciation is allowed under the “general permission” to the extent that the asset is used in deriving assessable income or in the course of carrying on a business for the purpose of deriving assessable income. The depreciation loss is calculated on a monthly basis to reflect the number of months the depreciable property is used or available for use. For most assets, no depreciation loss is allowed in the year the asset is disposed of. If the depreciable asset’s sale price exceeds the book value, depreciation recovery income arises.
What can you depreciate on a residential rental property?
Fit-out depreciation or depreciation of separate items is not allowed. To help understand what you can depreciate, ask yourself if the item is part of the building and follow the 3 step test:
Step 1: Is the item attached or connected to the building?
– If not, it is not part of the building and therefore can be depreciated separately.
– If yes, go to step 2.
Step 2: If the item is attached, then is it an integral part of the rental property?
– If yes, it is part of the building and therefore it cannot be depreciated.
– If no, go to step 3.
Step 3: If the item is not an integral part, can it be removed (by not damaging the item or the building)?
– If no, then the item can be depreciated separately.
– If yes, then the item cannot be depreciated separately.
The following items are specifically excluded from being depreciated separately to the building; plumbing and piping, electrical wiring, internal walls, doors (internal and external), garage doors (where the garage is part of the residential rental building), fitted furniture, kitchen cupboards, bathroom fittings and furniture (toilets, baths, showers, mirrors attached to the walls, built in bathroom cabinetry), linoleum and tiles (wall and floor).
However the following items are allowed to be depreciated separately from the residential rental building; wardrobes and cupboards (not built into the walls), carpets, curtains, blinds, water heaters, hot water cylinders, air conditioning and heating.
Galina then covered a section in repairs and maintenance and whether this can be depreciated separately. She used the following two examples as way of explanation:
Example 1. — Insulation top-up (no change in character or substantial replacement or renewal)
Peter and Alice own a residential rental property in Wellington that was built 30 years ago. After a cold snap, their tenants complain that the insulation in the house has deteriorated and is no longer effective. Peter and Alice arrange for new insulation to be inserted into the house. This is a repair to the property and does not change the character of the asset. Nor does it result in a replacement or renewal of substantially the whole of the house. The work done only restores the property to its former condition. The cost of the insulation is repair and maintenance expenditure and is deductible in the year it is incurred.
Example 2 — new insulation (improvement that changes character)
Ralph and Bridget own a residential rental property that has never been insulated. Their tenants have been asking for years for the walls and floors to be insulated. Finally, Ralph and Bridget agree and insulation is installed. The cost of this new insulation is capital expenditure. It is not a repair to the rental property. The addition of insulation to the house improves the house and changes its character. As insulation is part of the building it cannot be depreciated either. Therefore this is non-deductible expenditure, a “black hole”.
For further clarification on the above summary of Galina’s presentation on depreciation and deductions on residential rental properties, we would suggest you contact Galina Bell directly.
Andrew Nicol, Managing Partner, OPES Partners
Our final speaker for the evening, Andrew Nicol from OPES Partners, delivered a very well received presentation on successful property investment.
OPES Partners help people get started on the investment ladder, optimise existing investment portfolios and assist investors with the growth of current investment portfolios. This is achieved through their 5 step process:
- Educate people about property investment
- Find properties that make good investments
- Recommend those properties to investors
- Help investors structure their portfolio
- Help investors grow their portfolio
In terms of portfolio structure, Andrew made some very interesting points about split banking and what type of stock one should hold within your investment portfolio. This ensures that your assets are more secure, you have more control over the sales proceeds and are able to unlock equity; and as Andrew mentioned this is all done to increase your LVR (loan to value ratio). LVRs control how much you can borrow against your existing properties.
In terms of stock, Andrew highlighted the benefits of buying new over older properties:
- Ability to purchase more valuable property to achieve capital gain
- Higher likelihood of achieving capital gain
- Better quality tenants (higher rent return)
- Less and more consistent repairs
- Compliance with regulations from day one
OPES Partners are available to take your call and discuss your current portfolio and goals over the next 10 years, with some sage advice on growth and capital gain.
Property investment is best when everything is running smoothly, our focus on reducing or removing your risks will ensure it does. Contact Toni Heath on 021 894 546 or [email protected] to book in a complementary rent income assessment, an update on current market conditions and / or to arrange a property health check.