If you’re a property investor, make sure you’re claiming all the deductions that you can. Property investors often ignore depreciation and miss out on some of the huge tax benefits associated with owning an investment property.
Under Australian income tax law, you are allowed to claim deductions for expenses incurred in earning rent, including the depreciation of assets in the buildings and the cost of the building itself.
Read below for some helpful hints on depreciation.
1. Investors can claim capital works deductions for the construction cost of residential buildings built after July 1985. These capital works deductions can amount to large values.
Buildings are depreciated at a rate of 2.5 per cent a year or 4 per cent a year, depending on when the building was constructed, and deductions are spread over a period of 25 or 40 years. Deductions also apply to structural improvements or renovations to the property.
2. Investors can also claim depreciation for wear and tear on fixtures and fittings in the property, such as carpet, blinds, wardrobes, curtains, ovens and many more items. Assets are depreciated over their effective life, on which the ATO regularly publishes guidelines.
3. As soon as you buy an investment property, you should get a tax depreciation schedule (TDS) prepared by a quantity surveyor.
A TDS lists all items in an investment property that are falling in value, as well as annual depreciation allowances, including capital works deductions. The report can cost between $500 and $1000 (which is tax deductible) and usually covers up to 20 years of deductions.
Once you get the TDS, your accountant can put the numbers in the tax return. In terms of buildings, only a surveyor can value the building for tax purposes and then work out capital works depreciation allowances, though an accountant can help you depreciate assets.
Some new properties come with a TDS, but investors should always get their own prepared to ensure they are taking full advantage of depreciation allowances.
4. There is a common misconception that only new properties are eligible for depreciation allowances. However, even if you house is a few years old, it might be that you can still depreciate assets or the value of the house. While depreciation deductions on a new house can amount to $10,000 a year, for a seven-year-old house could be between $3000 and $4000, according to some experts.
5. Deductions on new units in large apartment complexes can be significant, in some cases amounting to more than $10,000 a year.
There are typically more depreciation deductions for a new high-rise apartment than for a house because there are more plant depreciation allowances on the fixtures, as well as depreciation on shared facilities, usually based on the unit entitlements of the strata plan. So make sure your TDS includes deductions for common property.
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