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Depreciation Rules for Residential Rental Properties: Understanding IS 10/01

Determining whether an item in a residential rental property is a separate depreciable property or part of the building is essential for tax compliance and claiming depreciation. Interpretation Statement IS 10/01 provides the Commissioner’s view and outlines a clear three-step test to classify such items.

The Three-Step Test

Step 1: Is the Item Attached or Connected to the Building?

  • If the item is completely unattached, it is not part of the building.
  • Plugged or wired items are considered unattached.
  • If the item is attached, proceed to Step 2.

Step 2: Is the Item an Integral Part of the Building?

  • Would the rental property be incomplete or unable to function without the item?
  • Integral items are considered part of the building.
  • If not integral, proceed to Step 3.

Step 3: Is the Item Part of the Building’s Fabric?

  • Consider the nature and degree of attachment, as well as the difficulty and potential damage during removal.
  • Items forming part of the building’s fabric are considered part of the building.

Examples from IS 10/01

Part of the Building

  • Plumbing and Piping: Attached, integral.
  • Electrical Wiring: Attached, integral.
  • Internal Walls and Doors: Attached, integral.
  • Garage Doors: Attached, integral.
  • Fitted Furniture (e.g., built-in wardrobes): Attached, not integral, but forms part of the fabric.
  • Kitchen Cupboards: Attached, integral.
  • Linoleum and Tiles: Attached, not integral, but forms part of the fabric.
  • Heating/Air Conditioning Systems (built-in): Integral.

Separate Depreciable Property

  • Bathroom Fittings and Furniture: May be argued as a separate asset depending on attachment.
  • Freestanding Wardrobes and Cupboards: Not attached.
  • Carpet: Attached, not integral, not part of the fabric.
  • Blinds: Attached, not integral, not part of the fabric.
  • Water Heaters and Hot-Water Cylinders: Not attached.
  • Heating/Air Conditioning Systems (not significantly attached): Separate asset.

IS 10/01 provides a structured framework, helping property owners navigate this aspect of tax compliance effectively.

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