What To Do When There’s No Construction Cost Record For Your Investment Property
With any older investment property there is a strong possibility that no reliable records, reflecting the building’s construction costs way back when, exists. Yet, because these are claimed as tax deductions over a very long period, there’s value in it to start claiming the remaining amount of the depreciating costs. Property acquisition and taxation specialist Matthew Mousa partner at Sydney-based TLK Partners’ offers some possible solutions for this scenario.
“Basically, if no reliable records can be found to back up a claim, the new owner will have to estimate the construction costs,” Matthew says, “and then pick up where the last owner left off. If the building was constructed prior to 17 July, 1985, there is no need to worry about construction costs, as no deductions are allowed on buildings constructed for residential purposes or to earn an income.”
Who can estimate construction costs?
According to the tax regulations, valuers, estate agents, accountants and solicitors are not allowed to assess the construction costs, unless they are otherwise qualified to make a reliable estimate. The cost of any of the following experts is recognised (and deductible in the income year in which the payment was made).
The tax man will allow you to use the following people to assist you in estimating construction costs:
- A Clerk of Works: Someone who is, for example, the project manager for a large construction company.
- A Supervising Architect: This is an architect who approves payments for stages in a building project.
- An Experienced Builder: This builder would have to have experience in estimating costs for similar sized projects.
- A Quantity Surveyor.
How to calculate the deduction
Let’s suppose a property is bought on 19 July, 2016, and the owner wants to work out the deduction for the 2016/2017 tax year. The construction costs that will act as the base cost, were estimated by a quantity surveyor to be $115 000.
Construction costs are multiplied by the rate applicable to the year of construction by the proportional amount of the year for which he is able to claim. That means the number days during the tax year that he owned the property and used it to generate a rental income.
In this example that would involve multiplying $115 000 (the construction cost) by 2.5% (the applicable rate) and then multiplying that by 346/365 days (a full year less 19 days as he bought it on 19 July). The total deductible would be $2 752.
Estimating the construction costs of a pre-existing building can be a bit of a nightmare, but it is essential to ensure that rental property owners enjoy the maximum tax benefits allowable under the law.
“There’s a lot more to maximising investment property returns than meets the eye,” says Matthew. “Proper taxation and structure advice can yield significant returns for the savvy investor,” Matthew concludes.
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TLK Partners Wealth Management Companies Kingsgrove, Beverly Hills | Tax Accountant & Agent | Property Adviser are wealth advisers serving enterprises and private individuals who hope to take care of their future through sound financial management. Visit their website or contact them at (02) 8090 4324 for an appointment to discuss your financial management and investment needs.
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