Calculating depreciation on an investment property can mean claiming more at tax time. But, to claim all that you’re entitled to, you’ll need to keep the right records. Here’s how you could reduce your tax using property depreciation.
One of the greatest benefits of owning an investment property is the ability to reduce the amount of tax you pay at the end of the financial year. But if you don’t know what you can claim, you may be missing out on financial bonuses.
To help you avoid this situation, we’ve put together this handy property depreciation guide for you to use anywhere, any time, ensuring you’re claiming absolutely everything you can in relation to your property.
What is property depreciation?
Investment property depreciation is claiming the reduction in the value of items in your asset over their expected life. The life expectancy of items varies from product-to-product. For instance, carpets may have a shorter life expectancy (usually five to 10-years) than tiles, which may last up to 40-years. Therefore, their depreciation differs.
For new property investors, depreciation of items in an asset is like claiming the wear and tear of a vehicle used for income-producing purposes. Due to your investment property generating an income for you, you can also claim wear and tear on items within the property.
Anyone who owns an investment property can claim depreciation: it’s not just for seasoned investors. Financial experts recommend claiming depreciation from the time of purchasing your investment property and, in fact, some seasoned investors will buy an investment property purely for depreciation.
Some investors don’t understand depreciation fully or know what items they can claim. As a result, they may miss claiming thousands of dollars annually, which could have reduced the amount of tax they’ve paid.
How can you claim maximum property depreciation?
To avoid making a costly mistake and claiming all depreciation on an investment property you’re eligible for, financial advisors and accountants recommend getting a professional report prepared by a quantity surveyor.
The report prepared typically includes:
- Plant and Equipment: These are the items within the property that you own, such as the air-conditioner, oven, carpets, blinds and any other equipment you have purchased. If you’ve renovated the property, then keeping your receipts is a good idea, as new items can have a much higher depreciation value than ones that are a few years old.
- Building Allowance: Bricks, concrete, paving and outdoor structures such as pergolas fall under this category. A building allowance is only claimable on properties built after a certain date (Refer to the table in the section below).
You might be wondering why you need a depreciation schedule. The answer is it allows your accountant to find all the tax-deductible items easily. So, they won’t overlook any and, consequently, you will be able to claim the maximum amount that you’re entitled to at tax time. Without this schedule, your accountant may miss items.
How is property depreciation calculated?
Depreciation on plant and equipment is calculated using two methods – straight line and diminishing value – and both are Australian Taxation Office approved. These methods are as follows:
- Straight line depreciation – the worth of the depreciating asset declines consistently over its effectual life.
- Diminishing value – the depreciating asset’s value declines more in the early years of its effectual life.
Building depreciation, however, is calculated using a scale depending on the type of property that you own. If you own a residential, commercial or industrial property, then these buildings have various cut-off dates. These dates and the claimable depreciation rates are as follows:
|Accommodation Type||Building Allowance Dates||Depreciation Rate|
|Short-Stay / Holiday||21 August 1979 – 21 August 1984||2.5%|
|22 August 1984 – 17 July 1985||4%|
|18 July 1985 – 15 Sept 1987||4%|
|16th Sept 1987 – 26th Feb 1992||2.5%|
|27th Feb 1992 +||4%|
|Non-Residential||20 July 1982 – 21 August 1984||2.5%|
|22 August 1984 – 15 Sept 1987||4%|
|16 Sept 1987 +||2.5%|
|Residential||18 July 1985 – 15 Sept 1987||4%|
|16 Sept 1987 +||2.5%|
|Manufacturing||20 July 1982 – 21 Aug 1984||2.5%|
|22 Aug 1984 – 15 Sept 1987||4%|
|16 Sept 1987 – 26 Feb 1992||2.5%|
|27th Feb 1992 +||4%|
Property Depreciation Fast Facts
There are many questions that investment property owners ask about property depreciation. Some of these are:
- Can a depreciation claim affect capital gains tax? You’ll only be affected by capital gains tax when you go to sell your investment property. But, just remember that you can only claim expenses once annually on your property. Thus, if you’ve already claimed these in the financial year of sale, then you won’t be able to claim them again. Consequently, this may affect your capital gains claim.
- Should my accountant prepare my depreciation report? If your property build date was after 1985, then legally your accountant is not able to prepare your depreciation report. Under Tax Ruling 97/25, only quantity surveyors are authorised to prepare depreciation reports.
- Will my property need to be inspected? Typically to have a depreciation report prepared you’ll need to have a quantity surveyor visit your property. Most surveyors will arrange an appointment around your schedule.
- If I have a renovated property can I still claim depreciation? Yes, but you need to keep renovation receipts as proof of your claim. Also, if you didn’t carry out the renovations, but a previous owner did, you can still claim these using a quantity surveyor.
- How much does a depreciation schedule cost? The price of a schedule varies depending on the property type, dwelling size and property location. However, these reports generally range from $700 or more.
Are you looking to buy an investment property, but you’re not sure where to start? eChoice’s expert brokers can help you understand the market and simplify the process of applying for a mortgage. We have access to hundreds of products, so we’ll find you a competitive mortgage.
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