Should You Buy Assets Under $5,000?
24 July 2020
This is a recent video we have done that you might find helpful. It is a analysis of a Hamilton rental that was for sale recently and some options you could consider. View this short video (under 9 minutes) here: https://youtu.be/KLq2LrsI_Uc
Should you buy assets under $5,000 now to take advantage of Asset threshold change?
By Ross Barnett - Property Accountant
In the past, if you purchased an asset that cost over $500, then you would have to capitalize this asset and claim depreciation based on the rate set by IRD to reflect the assets useful lifetime. Whereas, if it cost $500 or less (for residential property investors this includes GST and also includes any installation), then you could claim this low value asset as a repair and fully claim the cost as an expense in the year spent.
- New threshold = From 17/3/20 to 16/3/21 $5,000 or less
- Long term threshold = From 17/3/21 $1,000 or less
This creates an obvious opportunity until 16/3/21, that you could buy assets worth $5,000 or less, and get a full tax deduction on the cost in this year.
So should you do that?
1. Cash buffer
At the moment, it is uncertain times. So, it is really important to have a cash buffer. Tenants might not be able to pay, or may pay late. You could lose your job or other income. Property prices could fall.
So before spending money on assets, you need to consider whether you have enough cash buffer, and in most circumstances, I would wait until September or October to see how things play out over the next few months.
The cash buffer could also be for opportunities. So, if you have cash available, you might be able to take an amazing deal that comes along.
2. Do you really need it?
In general most people love a tax refund and hate paying tax. Unfortunately, this logic is often wrong.
When buying an asset worth say $4,000, you are spending $4,000 to save a maximum of $1,320 in tax. So, in Net terms, you are still spending $2,680.
So, if you don’t need the asset, it is better not to buy it! I would look at assets that you must do, such as for Healthy Homes or insulation.
3. Are you making a loss?
With new Ring Fencing rules in from 1/4/19, if you are already making a loss and expect to make a loss for the next few years, then extra repairs will just make your loss higher and then be Ring Fenced. So there would be no cash benefit, so no point rushing!
- If $1,000 or under, then if you do it on 17/3/21 or after, then it will make no difference. No need to rush.
- If a repair, then threshold doesn’t matter. See point 5, but in general new shower, roof, vanities, toilet, kitchen cupboards, kitchen bench, painting will all be repairs.
- Assets that wear out quickly like computers have high depreciation rates. There is less benefit in having these as a repair, as they would have depreciated quickly anyway.
- Computer as repair, say $3,000 and reduce tax by $1,000 in 2021 year
- Computer as asset, 2021 approx $1,500 depreciation and reduce tax by $500, 2022 approx $1,500 depreciation and reduce tax by $500. So, end of 2022 would give very similar result for tax.
- Assets that wear out slowly like driveways have low depreciation rates. So, there is a big benefit in getting these as a repair if $5,000 or less, as depreciation would be extremely slow and at 4% per year.
- New Path $4,000. If done 17/3/20 to 16/3/21, then repair so reduce tax by $1,320 max
- New Path $4,000 done in April 2021, then asset. Year one depreciation only $160, and max tax saving $53 in year one. LARGE DIFFERENCE!
5. New property purchased
Anything done before tenanting is NOT a repair. So, if you buy a rental property, paint and then tenant, the painting is not deductible as a repair.
An example with assets, if you buy a rental property today, put in a heat pump for $4,000, new carpet for $3,000 and a new stove for $1,000, and then tenant, these items are not repairs, even though they are under the $5,000. They are a cost of buying the property.
So if you have just purchased and not tenanted, the $5,000 threshold makes no difference.
I hope you have found this useful.