A depreciation schedule may be your new best friend once you understand investment property depreciation and see how it could help you to claim deductions on your tax returns.
Depreciation is an important concept for property investors. Claiming depreciation on an investment property could help you save at tax time. If you’re interested in investing in property in Australia, make sure you understand what depreciation means and how it could benefit you.
What is investment property depreciation?
Let’s define the concept first.
When you purchase an investment property, you are generally treated for tax purposes as having bought a building, plus various separate depreciating assets, also known as plant items.
Property depreciation in this context is a tax deduction from the capital works expenditure on the property and decline in value of the property’s contents. Capital works may include the buildings or extensions, alterations or improvements to a building. The property contents generally are plants or things not fixed to the property, such as furniture and other freestanding items.
Before you can correctly work out how much you can claim, you need to get a depreciation schedule, which outlines the rate at which your assets decline in value and deductions which can be claimed. This is something that should be prepared by an accredited professional, such as a quantity surveyor.
Why is investment property depreciation important?
Investment properties are bought with the goal of generating income – usually through rental income as well as capital gains. This means they’re generally classed as a taxable asset.
Making tax deductions based on depreciation, to account for the natural wear and tear on the assets, could offset your taxable income from your property and may reduce tax payable.
Can I claim investment property depreciation on old properties?
You can claim capital works deductions on residential rental property built after 17 July 1985. If you don’t know the actual construction costs, you can get an estimate from a quantity surveyor or other independent qualified person. The deduction would generally spread over a period of 25 or 40 years.
From 1 July 2017, you can only claim depreciation on new plant items that you have purchased for your residential investment property – not second hand.
How does depreciation differ on new investment properties?
For a brand new property, you may be able to claim deductions on both capital works and depreciating assets (plant items).
How much you can claim as a tax deduction really depends on many factors. These include the size of the property and whether or not there are common areas that you could also claim on – lifts and lobbies, for example. Again, a professional calculation is essential.
How can I claim for depreciating property?
You can use an online depreciation calculator to get a rough estimate, but when it comes down to it, it’s best to get a bit of professional help with this, as it’s quite technical and complex.
First, you should get an accredited professional to do an inspection and create a property depreciation schedule based on the assets’ age and other considerations. This way, you’ll have an accurate estimate, and also ensure you don’t miss any assets that you might be able to claim on.
Make sure to use a surveyor accredited with the Australian Institute of Quantity Surveyors. Surveyor’s fees vary, but remember to consider the cost in the context of how much you might be able to claim as tax deductions. Plus, quantity surveyor fees are generally tax deductible.
Once you have your depreciation schedule, you can just share it with your accountant who will factor it in at the time of filing your tax returns at the end of the financial year.
Keep in mind, that you must keep the records of both income and expenses, including depreciation schedule relating to your investment property.
How is investment property depreciation calculated?
The capital works deduction is calculated at 2.5 per cent of the total construction costs per year over 40 years.
The depreciation for plant items is calculated based on the effective life span of the relevant asset. The effective life is basically how long the asset can be used to produce income. You can work out the asset’s effective life yourself or use the effective life as prescribed by the ATO.
The ATO offers two methods for depreciation calculations – prime cost (also known as the straight line method) or diminishing value method.
In the prime cost method, you claim a fixed percentage of the value of the asset throughout its effective life. The diminishing value method is based on the premise that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.
Low-cost items worth less than $300 can generally be claimed as immediate deductions.
When should I claim for property depreciation?
The best time to get a tax depreciation schedule drawn up is soon after settlement on the property. The schedule doesn’t expire, but does need to be updated if there are any renovations, repairs or replacements of assets on the property. Property owners prefer to get rental properties inspected before the tenants move in.
But, if you haven’t done this properly in your previous income tax return, you generally have time up to 2 years from the date of notice of assessment issue by the ATO to you for the relevant year to amend the tax return. You must consult your tax adviser if you wish to do so.
Now that you understand the basics of property depreciation, once you find the perfect investment property, get in touch with us on 131 900, or visit a branch to talk to your local Home Finance Manager to explore our current investor home loan rates.
Things you should know
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.
The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. The taxation implications on investment property are complex and you must seek independent tax advice to determine taxation implications that apply to your personal circumstances.
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