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Property Investment: Take advantage of depreciationDepreciation can make a big difference to the cash flow of your investment property. Speak with an expert
It is simply a recognition of the decline in value of an asset over time.
In the real world things get older, they becomes worn out, and their value decreases. Depreciation is how that process is recorded in financial accounts.
The ATO allows you to claim for the depreciation (which they call decline in value) of the assets used in earning income. This includes the assets in your investment property.
When you purchase real estate you are actually buying three things:
- Assets in the buildings
Depreciation can be claimed on the assets of your property over the course of their “effective life”, as set by the ATO. For example, the ATO suggests a ceiling fan has a life of 5 years, and carpet 10 years. Even the buildings themselves can be deducted over time. Buildings and fixtures attached to the building can be deducted at the rate of 2.5% per year.
Depreciation deductions are great because they allow a deduction without an expense. Specifically:
- You can claim deductions for assets and buildings even if you didn’t pay for them. When a property is sold the new owner inherits the unclaimed depreciation of the old owner.
- Depreciation is cash flow positive. Normally, to claim a deduction you first have to incur an expense. With depreciation, you get the tax deduction without having to incur any cash outflow. Unlike other expenses, depreciation puts money back in your pocket.
A quantity surveyor can produce a depreciation report for a property. The report details all your assets, fixtures and buildings, and determines the deduction you can claim each year over a period of 40 years. A depreciation report could save you thousands in tax, especially if you have purchase a newly built property.
The cost of a good quality depreciation report is around $700, and is tax deductible for rental property owners. Not every property has enough depreciation deductions to justify the cost of the report. If you are unsure, simply call the quantity surveyor and ask them if the report will benefit you. Generally a report is worthwhile if your property was built within the last 10-15 years, or has had recent significant renovations (whether by you or the previous owner). Your depreciation deductions can save you thousands in tax.
You may want to know who we think are the best depreciation report providers? The best one I’ve dealt with are BMT Quantity Surveyors. They are professional and their reports are thorough and easy to read. They will tell you whether a report is needed or not for your investment property. And they send a copy of the report to your accountant via email to keep everybody in the loop. (Note: they don’t give a referral kickback to accountants, and have not paid for this endorsement!)
Depreciation can be claimed without a professional depreciation report. If you were an owner-builder or the building was renovated while you owner the property then you probably have details of all the costs and outgoings. This will enable you to work out your own depreciation.
All you need is the date you bought the asset, the amount paid, and the effective life of the asset. The ATO has a comprehensive list of rental property assets with the corresponding effective life. They publish these in their annual guide for rental property owners. At the time of writing the latest version was 2010-11.
You should note that you distinguish between capital allowances (e.g. free-standing assets) and capital works (like buildings and assets that form part of the building, e.g. tiles). These are included in two separate parts of the tax return.
Amendments can be made to a prior year tax return to include any change or adjustment. Depreciation is no exception. You can amend your tax return up totwo years after your return was assessed. The exact deadline for amendments depends on when you lodged the original return. The amendment period is four years for some taxpayers. Your depreciation report will be backdated to include years you’ve previously missed.
Making the right tax decisions will enhance the overall return you get from your property. Beyond Accountancy have staff who are experienced in helping property investors optimise their tax position. By helping you understand how you can make the most of the advantages in the tax system we help you minimise tax, maximise your investment yield and optimise your cashflow.