When you think of tax deductions for a residential property investment, you probably think of things like mortgage interest, maintenance & upkeep, property management fees, council rates, etc. But there's one other very big deduction you may have overlooked... depreciation.
Matt Stanley from Asset Economics shares his knowledge and the benefits of getting a Depreciation Schedule for your property...
What is depreciation?
As your investment property ages, the building itself actually depreciates in value, even as the overall value of your investment increases. This isn't as surprising as it first sounds; after all, your land may get more desirable with age, but most buildings certainly don't. In other words, your land is responsible for the increase in value – the house or unit on the land just gets old and tired.
Why is depreciation tax deductible?
Much of your property's depreciation is considered an investment expense, making it tax deductible. In other words, you can reduce your taxable income, and therefore pay less tax. Generally, this equates to a significant tax refund at the end of each financial year.
How much depreciation is tax deductible?
How do you know how much depreciation is tax deductible? Unfortunately, this is where it gets tricky. The Australian Taxation Office (ATO) has a lot of complicated rules and regulations governing what's deductible depreciation and what's not. Even your average tax accountant doesn't have the specialist expertise to ensure you claim all the depreciation you should and - just as importantly - nothing you shouldn't. In fact, these days most tax accountants simply advise you get a depreciation expert to prepare a detailed tax depreciation report for your investment property. Only then can you be sure that you're not missing out on depreciation-related deductions you're entitled to, and that you're not making illegal claims. (If the ATO catches you claiming deductions you're not legally entitled to, you'll have to pay them back and you can be fined.)
How do you choose a depreciation expert?
Just as you wouldn't choose any old tax accountant to do your annual return, you should pay very careful attention to who prepares your depreciation report. For maximum tax deductions and complete compliance with AIQS regulations, make sure:
• The person who prepares your report is a fully qualified quantity surveyor and that they are a member of the Australian Institute of Quantity Surveyors (AIQS).
• You know exactly what you'll be charged for your depreciation report - you should be able to get a free fixed-price quote with no obligation.
• You know the turnaround time for the preparation of your depreciation report.
• Your depreciation company provides a money-back guarantee if your deduction isn't at least twice as much as their depreciation report fee.
What is a Quantity Surveyor?
A Quantity Surveyor is an independent professional consultant to the construction and property industries. Typically, Quantity Surveyors provide construction cost advice to property owners, investors, and developers. However, Asset Economics offers investors specialist advice on property tax allowances relating to income producing properties.
Property tax allowances are a valuable aspect of any property investment due to their ability to enhance an investor's return and produce a better cashflow. However, a high level of expertise is required to ensure that investors obtain maximum allowable entitlements.
What are property tax allowances?
Property tax allowances form part of the Income Tax Assessment Act 1997 (hereafter called 'the Act') and provide an opportunity for owners of income producing property to reduce their assessable income. There are a number of property tax allowances available to property owners, investors, and developers, including allowances for building structure and depreciation on plant items. Property tax allowances are often simply referred to as property depreciation.
Can property tax allowances increase my investment return?
Property tax allowances can reduce an investor's assessable income, and by correctly claiming and maximising these deductions, investors can significantly enhance the after tax return from their investment and generate a healthier cashflow.
What allowances are available for my investment?
Depreciation Allowances (Division 42 ITAA 1997)
Depreciation allowances are available to owners of plant in both new and secondhand properties that produce assessable income. There is no definition of plant under the Act. However, attached to Income Tax Ruling 2000/18 there are over 850 items of plant that may be depreciable including carpets, air conditioning and light fittings. Depending on the property's specifications, furnishings and sale contract conditions, owners may be eligible to claim between 10% - 20% of the building's value as depreciable plant.
Building Allowances (Division 43 ITAA 1997)
Income producing buildings can be eligible for building allowances, provided construction commenced after 17 July 1985, or in the case of short term travellers accommodation after 20 August 1979. The rate of write-off is either 2.5% p.a. or 4% p.a. dependent upon construction commencement date. Building allowances apply to the overall qualifying component of the original or refurbishment construction cost. These are calculated from the date of completion of construction (excluding the cost of all plant and non-eligible items).
The following table shows an example of the property tax allowances available to property investors when claims are professionally prepared. Residential Property with a Purchase Price of $175,000 which includes a land value assessment of $45,000.
Renovations, extensions, repairs, and write-off of demolished works can provide additional opportunities for the investor to increase the deductions and return on their property.
When should I obtain a property tax schedule?
The best time is usually as soon as possible after settlement. Items included in the original purchase price can then be identified as distinct from any items and/or expenses incurred during the remaining period of the property ownership. The ability to analyse these costs allows for greater accuracy and maximum returns from the calculation of depreciation and building allowances.
Click here for your $50 voucher towards an Asset Economics depreciation schedule - www.asseteconomics.com.au
