Investment Property Tax Depreciation Schedule Explained
Every property investor wants to pay less tax and increase their income streams, but up to 80% of investors fail to take advantage of one of the big tools available to help them do just that: property depreciation.
A professional tax depreciation schedule can be the difference between a negatively geared property and a positive cash flow that you can enjoy right now.
Are you one of the 80% who are missing out?
Here are the top five reasons people don’t claim depreciation and how to turn that around so you too can access thousands of dollars in property investing tax savings.
1. Don’t understand what tax depreciation is
Tax depreciation is a bit of a mystery in the investing world, simply because it is a non-cash deduction.
That means that when you are sitting there at the end of the financial year tallying your receipts, the’ cost’ of this significant tax benefit does not enter the equation.
You do not have to spend any money on your property to be eligible for depreciation.
According to Australian income tax laws, property investors are entitled to claim the decline in value for certain parts of their property.
This can be for any residential or commercial property, block of units or rural property that generates assessable income.
2. Don’t know what they can claim
You can claim a whole host of items using depreciation, including carpets, curtains, appliances and even the pool filter.
Depreciation for investment properties is divided into two categories: Plant and Equipment, and Building Allowance.
Plant and equipment depreciation refer to the value of all the fittings and fixtures within the house including carpet, curtains, dishwashers, hot water systems and lights.
The building allowance refers to the construction costs of the building itself.
This includes bricks and concrete, general wear and tear and any renovations or extensions you, or previous owners, may have added.
Allowances related to renovations can be a bit trickier to determine.
There is a fine line between repairs and maintenance and works that could be considered an improvement and it pays to get a before- and after-renovation tax depreciation schedule to make a claim.
3. Didn’t know that a depreciation schedule could unlock substantial savings and benefits
A tax depreciation schedule is an official report that comprehensively outlines every item eligible for depreciation in your investment property.
A good accountant should be able to point you in the right direction and advise you of ways to maximise your tax return including a tax depreciation schedule.
If you have a professional tax depreciation schedule, your accountant can keep a copy and lodge it when you submit your tax return each year in order to minimise your assessable income.
The benefits of a tax depreciation schedule are far-reaching.
Depreciation deductions can significantly reduce your taxable income and help your property return a positive cash flow sooner.
For some investors, the depreciation benefits are a key factor influencing the purchase of an investment property.
It can turn the age-old rule of location, location, and location completely on its head and can be the difference in keeping or selling a property.
4. Don’t know if their investment property is eligible for tax depreciation
There is a misconception that only new properties are eligible for tax depreciation; this is simply not true.
According to the ATO, different items within an investment property have different depreciation rates depending on how long they will last and when it was added to the property.
For example: If new carpet is laid that costs $5,000 and it has a 10-year lifespan, you can claim $500 in depreciation for that item against your taxable income every year for 10 years.
You can also claim the write-off value of the old carpet that you have recently replaced, if applicable.
Investors can generally claim depreciation on a new property for a maximum of 40 years.
For an older property, investors can claim the balance of the 40-year period from the date of completed construction.
Properties built before 1985 are only allowed to claim Plant and Equipment depreciation.
Building Allowance depreciation is more complex and requires the expertise of a Quantity Surveyor.
While tax depreciation is particularly exciting for two-thirds of investors with negatively geared properties, you can still claim it on positively geared investments including commercial properties to realise even more significant returns.
5. Didn’t know they needed a professional tax depreciation schedule
Effective advisors are paramount to your success as a property investor but accountants, property managers, real estate agents, solicitors and property valuers are not properly qualified to provide a full tax depreciation schedule.
If your residential property was built before 1985, your accountant is allowed to estimate the construction costs where they are unknown but every property constructed after 1985 requires a professional quantity surveyor to make this estimate.
A Quantity Surveyor is a tax depreciation specialist. They inspect your home and prepare a report for your accountant outlining all the depreciation deductions across the different categories that your property is eligible for.
But that’s not all!
6. Can’t afford a professional tax depreciation schedule
When every dollar counts, investors can easily justify minimising their expenses.
While it does cost somewhere in the vicinity of $500 to $1000 to arrange a depreciation schedule, it’s important to understand that failing to get this report could cost you thousands of dollars in tax deductions come tax time.
In fact, many Quantity Surveyors actually provide a guarantee that you will save money in the first year or they will refund the cost of their service.
The cost of having a report drawn up by a specialist Quantity Surveyor differs depending on the location, size and type of property you have invested in but all of the fees associated with the Quantity Surveyor are generally 100 per cent tax deductible.
A professional Quantity Surveyor inspects your property in person and takes note of all items eligible for depreciation along with photographic evidence.
They then prepare a comprehensive report based on a thorough understanding of the ATO guidelines.
7. Think they missed the opportunity to claim depreciation
It is best to get a quantity surveyor to inspect your property straight after settlement and before the tenant moves in.
If your tenant is already in the property, however, the quantity surveyor can still make arrangements directly with the tenant or property manager to do the inspection.
You only need to get a tax depreciation schedule done once, unless you are planning renovations or extensive changes, and that schedule remains valid for many years to come.
If you own an investment property and have not been claiming depreciation so far, you may still be in luck.
In many situations, your accountant can amend your last two tax returns to include depreciation on investment properties.
Your excuses, if you have any left, are now null and void!
If you haven’t yet arranged a property depreciation schedule on your investment properties, regardless of age, size and finishings, contact a reputable quantity surveyor today and tap into significant savings.
