Depreciation of Chattels: what is depreciable? what is not? Basically, the IRD gives you three steps to follow.
Step 1: Is the item attached or connected (in some way) to the building? If no, then it is a chattel. If yes, then it possibly is not a chattel. If it is a yes, don’t despair however. Put away those tissues, dry your eyes and go to step 2
Note: if the only connection is that the item is plugged or wired into an electrical outlet or socket or connected to a water/gas outlet, then that’s okay. That doesn’t count as being attached or connected, thus the item is a depreciable chattel.
Step 2: Is the item is an integral part of the building? In other words, if you took it away, would the building be considered incomplete or unable to function? If “No,” then it is a chattel. Hooray! If the answer is “Yes,” then the item will be a part of the building, not a chattel. Again, there is more to it. If the answer is “No,”, go to step 3. Do not pass go. Do not collect $200.
Step 3: Is the item built-in? attached? connected to the building in such a way that it is part of the “fabric” of the building? Hmmm. Good question. You’ll need to consider factors such as the nature and degree of attachment, how hard it would be to remove it (e.g., removing tiles would be difficult), and whether there would be any significant damage to the item or the building if the item were removed (e.g., using the example of tiles, probably). So, if the answer is “Yes,” then the thing/item is not a chattel.
Want to hear it from the horse’s mouth? Click here and here to read up about it on the IRD website. We also recommend reading this excellent article at GRA. It's about improvements and their deductibility.
NB: We are not affiliated with or endorsed by GRA in anyway. But they're good at what they do, and we respect them highly. Image courtesy of nuttakit / FreeDigitalPhotos.net
Accounting for your rental residential investment property; general taxation advice.