Want to maximise your deduction claims on an investment property?
Claiming depreciation on an investment property is a great way to minimise how much tax you pay, and ultimately maximise the return on your investment.
However, it's important to know how depreciation works, so you can claim everything you are entitled to.
Let's start by understanding what depreciation is as it relates to property and property investment.
What is depreciation?
Depreciation is an accounting term that refers to the decrease in value of an asset as it ages. This could apply to a building - such as your investment property, or the contents of a property (also called plant and equipment), such as the fixtures and fittings.
Because your asset (property) produces income (in the form of rent), you are able to claim these losses via depreciation. How much you can claim on your tax return from depreciation varies depending on the type and age of building, and what contents or assets you have in it.
What is a tax depreciation schedule?
A tax depreciation schedule - or property depreciation report - is a document which tells you the rate of depreciation claimable on your property, and when you can claim it.
They are produced by a quantity surveyor, who are experts at calculating the cost to build or renovate an investment property, and how much they depreciate over time. They also keep up to date on any changes the Australian Tax Office (ATO) makes to tax legislation.
Their assessment is based on the effective life of an asset - which the ATO determines and publishes annually. It is based on the reasonable wear and tear of an asset, and the period within which it is likely to be scrapped.
A quantity surveyor will need to physically visit and inspect your property to produce a property depreciation schedule. They will estimate the cost of the property's construction and calculate how much building depreciation you are eligible for, and then create a list of all the items in your property that are depreciable assets.
From this they can produce the schedule and pass it onto you or your accountant, so this can be submitted with your tax return.
Who should have a tax depreciation schedule done?
If you own an investment property, you should have a depreciation schedule carried out. The best time to get a depreciation schedule done is just after you settle on the property, though you can also have one done on older buildings.
Generally speaking the newer the property, the greater percentage depreciation you can claim - which is one of the pros of buying a newer building. You can still get a depreciation report produced on older properties, but if it was built before 1985 you might only be able to claim on the plant and equipment portion.
How much does a depreciation schedule typically cost?
For residential investment properties, expect a depreciation schedule to cost anywhere from $300 to $800, depending on the amount of work required.
The good news is that the depreciation schedule itself is 100% tax deductible, so be sure to include this in your tax return or remind your accountant to.
What can you claim?
Now let's get down to the nitty gritty - what is and isn't claimable.
This is tricky as different rules apply depending on the age of the building and assets. Depreciation is calculated based on when construction began on the property, but you cannot begin claiming depreciation until after construction is complete. Tax law is also always changing, and the effective life of claimable items can and do change over time.
In terms of building depreciation, for properties built after 15 September 1987, you can claim 2.5% (of the value of the building) depreciation each year until it is 40 years old.
Major renovations, such as remodelling a bathroom, are classed as capital improvements by the ATO and are claimed as capital works deductions. These cannot be claimed in the year you incur them. Deductions for depreciation and expenses incurred while building/renovating are deducted over a number of years. This is done on a sliding scale, depending on when your property was built.
You can also claim for plant and equipment depreciation, for items such as carpets, light fittings, stoves and furniture. This does get complicated as items have different effective lives, so each needs to be individually claimed at its own rate of depreciation.
How much may I be able to claim back on my tax?
Giving an estimate of how you may be able to claim depends on a number of factors, including your tax bracket, age of the building and what assets you have in your investment property. For example, if you are in the 37% tax bracket and claim $5,000 in depreciation, you will be saving $1,850 in tax.
Getting help with tax depreciation
Tax depreciation is a specialised field, so you will need to contact a quantity surveying company, like Asset Reports, to do this for you. They are experts at assessing the value of construction work and wear and tear.
Tax agents and accountants are not qualified to undertake this kind of task, and will generally outsource this work to a quantity surveyor if you approach them.