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Tax impact of Selling or Buying Second-hand Depreciating Assets
What happens when you sell an asset that still has a taxable value? Or what if you buy a second-hand asset – or, worse still, the asset is part of a package deal? In this part of an on-going series on tax impacts on investment property owners, Baxton Property Management offers insight into how to handle these situations, and what effect they have on your tax obligations.
Tax deductions on depreciating assets
Dealing with tax deduction claims on long-life assets can be a bit like finding your way through a labyrinth, even when you’re dealing with new items that will help generate rental income. Yet getting through this maze can become even more complicated, when other factors become involved, like the disposal of a depreciating asset.
Basically, a depreciating asset is one which has a long projected lifespan as an effective asset in generating income. Deductions against income, originally based on the asset’s initial cost, are spread over a period of years on a sliding scale schedule. This scale takes into account the asset’s dropping value and shortening lifespan as an income generator.
Disposal of a depreciating asset
When an asset like this can’t (or won’t ever again) be used to facilitate your rental income, its tax position as a depreciating asset changes immediately. Because it is no longer involved in generating an income, it doesn’t count as a deduction on future tax returns, and therefore stops playing any part in determining your future taxes. But it can’t just disappear off your return before the books on its tax history, including any remaining depreciation value, have been balanced and closed.
There are various ways you can have “disposed” of an item like this. The most obvious is that you have sold, lost or destroyed it. You may have planned to use the asset to generate rental income, and then decided against it; cancelled its installation; or changed the way you use it, so its sole purpose is no longer generating a rental income. An asset may also have to be “disposed of” if you considered getting it while in a partnership, but the use of the asset, or the nature of the partnership, has changed since then.
All these reasons are valid ones for its disposal in terms of tax. The bottom-line is that you must be able to affirm that you do not expect to ever use it again for its original purpose.
Balancing adjustment event
To change the asset’s status somewhere down the line, when the depreciation process has not been completed, requires levelling the scales on what’s gone out and what’s come in with regard to that asset’s disposal. This involves creating a “balancing adjustment event” on your tax return. To do this, you need to take the following steps:
- Work out what value of the depreciating asset remains unclaimed. This becomes the balancing adjustment value.
- Then take the price you got for the depreciating asset when you sold it, or scrapped it (the termination value), and compare it with the adjustable value.
- If the termination value (sale price) of the asset is greater than the adjustable value; the difference between the two becomes a form of income which has to be added to your assessable income along with your income from other sources, including rent. However, you don’t include it as part of the rent, but instead list it under “Other Income” on your tax return.
- If the adjustable value is greater than the termination value, you deduct the difference on your current return.
Purchase of second-hand assets
If you purchase a second-hand asset, you can generally claim its price in the same way you would claim the cost of a new asset, and subject to the same conditions regarding its projected life-span and purchase price as are applied to new assets.
However, if second-hand assets form part of package when you buy a rental property, there are some steps that need to be taken to separate then from the rest of the package.
- The depreciating assets that come with the rental property must be separated from the price of the property itself based on reasonable values determined by both seller and buyer, and specified as part of the sale agreement.
- If they aren’t specified, you will have to determine a reasonable cost yourself or call in a qualified evaluator to do it for you. Whichever way you go, you must be able to show that you have a firm basis for establishing the value.
Understanding and following the correct procedures helps avoid ramifications with regard to your tax obligations. But doing so takes precious time, and can add extra stress when it’s tax season. Let Baxton Property Management, the best in Australia, take the responsibility for managing your rental property, and remove some the pressures of you. Contact us at the Baxton website.
Written and syndicated by
– Baxton Media.
- Property Owners’ Tax: How do I claim on borrowing expenses?
- Rental property tax: Interest, land tax and other deductibles
- 6 things you can claim to maximise tax savings
We hope you enjoyed this article
The information contained in this article is based on the authors opinion only and is of a general nature which is not indicative of future results or events and does not consider your personal situation or particular needs. Professional advice should always be sought relevant to your circumstances.
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