Tax Depreciation of residential investment properties is a significant potential value that is often left untapped by the majority of investors. This is because its value is not fully appreciated or understood by most investors, real estate agents and accountants. Actually, it is one of the few things in life that sounds too good to be true, but is true.
What is tax depreciation?
As a building gets older and items within it wear out, they depreciate in value. The Australian Tax Office (ATO) allows owners of income producing property to claim a tax deduction called depreciation, on a building’s structure and plant and equipment assets contained within it.
How do property owners claim depreciation?
All the assets are included in a schedule - a description of the asset, type of asset (Plant & Equipment or Capital Works), its original value and date of assessment. They are allocated a depreciation method (diminishing value or a fixed percentage) and a depreciation rate (a higher rate for short-life assets and a lower rate for long-life assets).
The calculations produce three summary figures, the starting value of all the assets, the depreciation amount for that financial year and the remaining un-deducted value to be used for next year’s calculation. The depreciation amount for the financial year is deducted from the income for the year, reducing the tax payable by the owner. This is often a substantial amount of money and invariably considerably exceeds the cost of preparing the depreciation schedule.
Who can prepare a Depreciation Schedule and why you shouldn’t DIY?
Only people authorised by the ATO may produce comprehensive depreciation reports. Many owners and accountants will look to depreciate some obvious plant and equipment, such as a renovation or new carpet or a stove etc. What they don’t realise, is that they could also be claiming a multitude of other items - the capital cost of the building, the carpet and light fittings etc that were there when they bought it and even a percentage of the common property. The completed report looks quite complicated, but summarises everything down to a couple of figures that are entered into the tax return each year. The report produces savings for 40 years.
A common reaction we find from investors is that they wish they had known about it before. We can’t wind back the clock, but the report will provide you with the ability to re-coup unclaimed or missed tax benefits for up to two years.
When renovating, it’s sad to be tossing out an old kitchen, air-conditioner, vanity or carpet. The good news is that all the remaining un-deducted depreciation value of the items can be claimed in that year (scrapping), so it’s best to get a report before renovating, not after. Effectively, you claim all the old and the first year of new at the same time.