An investment property is a lot like a business, and as with any business, tax is a key component. Some savvy investors will actually consider depreciation before they purchase their investment. However, many investors overlook the value of tax depreciation in their investment and miss out on potentially thousands of dollars. So what is it all about? Here’s everything you need to know about tax depreciation for your investment property.
What is it?
Basically, tax depreciation allows you to claim wear and tear on items and decline in value of investment property as tax deductions against your assessable income. Just as interest payments and property maintenance are tax deductions, so too is the depreciating value. If you’re unfamiliar with the process, there are two types of allowances available: depreciation on Plant and Equipment, and depreciation on Capital Works. Simply put, Plant and Equipment refers to items inside the property, such as appliances, blinds and carpet, while Capital Works relates to the structure, permanent fixtures and associated costs of the building itself. You can offset both of these costs against your taxable income.
Is it worth it?
Put it this way, when you make a purchase at the supermarket, do you stick around to receive your change? Of course you do! Because it makes no sense to pay more than you should, and the same principle applies to depreciation. The major benefit of claiming depreciation on tax is that it reduces your taxable income, therefore improving your cash flow. While this alone is not a reason to invest, it certainly has the potential your property investment easier to manage and build a portfolio faster. Calculating the depreciation on assets can be a little complex, as they depreciate at different percentages, but investing a small amount of time could give you a large amount of savings. However, due to the rules and in-depth requirements of the process, it is advisable that you seek advice and assistance from qualified professionals.
How do you get a schedule?
A qualified and accredited quantity surveyor is a specialist in the accurate measurement of construction costs and can inspect the property to gather necessary information for a tax depreciation schedule. Of course, there is a fee for the inspection, which varies depending on the property. But the good news is that it’s 100% tax deductible. If your property was built after July 1985, you can claim depreciation on both Capital Works and Plant and Equipment. However, any properties build after this date can only claim depreciation on Plant and Equipment. But it will still be worthwhile.
The bottom line
The bottom line is that depreciation will help improve your bottom line at tax time (see what I did there?) Anyone who owns an investment property is entitled to claim depreciation on the building costs and items within the property. And while you can back claim up to two years on tax returns through your accountant, in order to obtain a depreciation schedule, you will need a quantity surveyor to provide an estimate of constructions costs to meet the requirements of the Australian Taxation Office.
What do you need to do?
- You can depreciate buildings and fixtures and fittings, like kitchen cabinets, curtains, hot water systems, ceiling fans etc. However, you can’t depreciate land (as you may remember we mentioned in a previous video).
- It’s important to have a document that the tax office accepts as a basis for your depreciation and that allows for the maximum claim. The most concise claims are best prepared by a Quantity Surveyor (QS). The cost for this report is between $250 -$650 and can also be claimed as a tax deduction. Make sure you get a QS depreciation report completed when you purchase a property. Otherwise, you can do it in the first year you receive income on your property. Ask your property manager or your accountant for a Quantity Surveyor in your area. Do NOT let your accountant estimate your depreciation claims, their job is accounting, not quantity surveying!
- Claiming the maximum amount for depreciation will bring you a significant tax benefit. Many property owners aren’t aware of this or don’t claim the correct amount. Depreciation is a non-cash deduction.This means you do not need to spend any money in that year to be able to claim it. Our free download today is a case study showing three scenarios of how much money depreciation can put back into your pocket.
- Property owners of houses built prior to 15 September 1987 can only claim depreciation on the structure. (Not on any fixtures and fittings). However, you can claim the depreciation on renovations or structural improvements on these older houses if they were completed after that date. Particularly owners of old houses often don’t know they can claim depreciation. So if you own an old property make sure you get a report done. Then, you can claim your depreciation and increase your cash flow.
- To find out when the home was built ring the local electricity provider and ask when the power was first connected or your local council to search their records for the certificate of building completion.
- If you renovate your investment property, ask your Quantity Surveyor to update the depreciation report and include any new claimable items.
- On purchase of a property, depreciation starts all over again even if the previous owner had already claimed the maximum amount. So make sure to get that Depreciation report done when buying a rental property (in case you missed my point before).
- Remember, you still have to budget your cash flow for repairs and maintenance. These are fully deductible from your income when they occur.
*UPDATES- RECENT CHANGES TO DEPRECIATION RULES*
If you have invested in or are considering investing in the property market, you might want to know about two major changes recently made to rental property deductions:
Travel associated with rental properties
For the 2017/2018 and subsequent financial years, taxpayers who own rental properties will no longer be able to claim tax deductions for costs incurred in travelling to inspect or maintain their rental property. This includes air fares and accommodation, as well as car expenses, and it extends to travel to see real estate agents and to hardware stores to purchase materials for repairs.
Depreciation claims on items previously used in residential rental properties
Where fixtures and fittings are purchased after 9 May 2017, depreciation will not be allowed on those items from 1 July 2017. Note that this restriction only applies to fixtures and fittings that were previously used. If you purchase or build a new property for the purposes of residential rental investment, then the fixtures and fittings can still be depreciated because they have not been previously used. Also note that the building allowance can still be claimed. So, there is still some incentive to consider obtaining a quantity surveyors report if a building allowance can be claimed on a property, or if the property is new residential premises.
There are 2 main exceptions to these new rules:
- Companies that own and rent out residential properties;
- Residential rental businesses such as motels, aged care facilities and student accommodation businesses.
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