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Rental Properties & Effective Life

This is a topic I’ve been meaning to expand on for some time and it ties into a post I did a couple of months ago about Depreciation. Expanding on that though, this covers how depreciation can be applied to resolving disputes about Damages. While we can hope that properties aren’t found to be damaged during or at the end of the tenancy, whether it’s accidental or malicious, damage does happen.

This Blog also is meant to educate all about managing expectations, such as how you can or should expect a property’s condition to be at the end of any tenancy. This encompasses wear & tear as well because everything has a useful life span or expectancy and that’s where this Blog covers an owner’s rights to compensation for any damages and how these can be calculated.

When we talk about damage, we’re referring to anything that’s beyond wear & tear, I’ve covered that and the difference here.

I might be going out on a limb sharing this, but when a tenancy dispute can’t be resolved internally, these matters end up at NCAT, NSW Civil & Administrative Tribunal. The tribunal can hear & rule on disputes where agreements can’t be made between parties and they will apply the appropriate tenancy legislation to the case. Similar to any court or tribunal, they hear facts and information but ultimately apply the law, so not all outcomes are necessarily the ones that parties want.

Let’s keep in mind, any damage disputes ending up in the Tribunal is a worst-case scenario, but this is essentially how the tribunal would decide on a dispute surrounding damages, and all parties need to factor this in because the outcomes are out of all parties hands once you end up here with two parties who won’t conciliate or compromise to an agreement.

“let‘s be clear that we’re talking about accidental, minor, and mostly superficial damages. Damages that can be repaired but where the responsibility and cost / compensation amounts are in dispute.”

There are many examples of disputes in Rental Properties where there is damage to property and with these disputes, a very relevant factor that gets forgotten and needs to be considered is; age. The Age of the damaged fitting or fixture.

There are many examples of disputes in Rental Properties where there is damage to property and with these disputes, a very relevant factor that gets forgotten and needs to be considered is; age. The Age of the damaged fitting or fixture.

Using the term lifespan, you can really say that everything in a property has a lifespan, a useful lifespan, and an economical one. That is, how long can you expect that item to last, reasonably, and how long of a period it has a monetary value that eventually depreciates down to not having any value.

It’s a fact of life that when we purchase something for a rental property, whether it be a new dishwasher or new floorboards that at the beginning of their lifespan they have a value of X, and we know what it is because there is either documentation or easily found comparables. Using a dishwasher as an example, it can only be expected to last for so many years or hold any value for so long. When a dishwasher is 15-20 years it’s certainly not going to sell for much at all as its economical lifespan has been surpassed.

Why is this relevant to Rental Properties? Because the ATO lists an “effective life in years” for assets in a property. A dishwasher is actually listed as having an effective life of 10 years. 8 years if purchased after July 2019!

The exact same applies for carpet and herein lies how a dispute is resolved.

If the carpet has significant marks at the end of a tenancy, a landlord would rightly consider that some compensation would be fair, and it would be. But the amount of which all depends on the depreciated value of the carpet and approximately where it is in its effective life and this is a huge factor in how compensation would be calculated. Carpet that is 20 years old and in really good condition could still justify some compensation but the age and effective life are always going to come into play here and it does for damages to any asset.

The ATO has a whole guide on Rental Properties which I refer to and that can be found here. Skip to Page 38 – it covers effective life.

A really good extensive list of assets is available thanks to Anthony Booth of MCG Quantity Surveyors can be found here too which references effective life and the Depreciative rate.

Not only do these guides assist in finding the value & effective life of an asset but from a Tax perspective, those assets that are considered to be Capital Expenditure can have their depreciation claimed as taxable deduction.

The ATO Guide above encompasses a lot of that info, however, MCG Quantity Surveyors or your accountant could answer any questions you have on that front.

My whole point here really is to inform and educate Investors & Tenants alike, everyone including some Property Managers I’ve seen, tend to learn some hard lessons in a Tribunal setting if not in the know.

When we’re completely in the know and aware of our legal position and what we’re entitled to we are much better prepared and armed for negotiations, even though the outcomes are not always the ones we want.

The tribunal certainly makes no qualms about making orders that neither party is happy with but one that all can live with and move on, enforced compromises we’ll say.

Aside from being in the know, record-keeping is essential as well, and that’s where having had a Property Manager on board that knows your property and its history in and out is a real benefit to owners.

Property Managers are known for being fastidious at record-keeping, we have to be, so a good Property Manager has systems in place for recording your property’s condition, upgrades, retaining important dates & records such as invoicing, quotes, and warranties. The more records kept and more information your Property Manager has, the better off you are in case of a dispute. Of course, I always urge any investor to try to log & keep track of any major upgrades & updates that have occurred and to keep their own copies of any invoices, etc.

MCG Quantity Surveyors have a lot more info you can check out on their website such as their Depreciation Calculator as well as their details Assets Effective Lives listings which are 21/22 accurate.

Hope you’ve found this to be somewhat informative!

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– Antonio

Director & Property Manager