Any owner of an income producing investment property is eligible for significant taxation benefits, one of which is a tax deduction for Depreciation which is the recognition that structures located on the investment property are wearing out.
Despite this fact, 80% of property investors are failing to take advantage of property Depreciation and are therefore missing out on thousands of dollars in their pockets, according to the CEO of BMT Tax Depreciation, Bradley Beer.
“Property investors often assume they are ineligible or that it is not worthwhile to claim Depreciation because they believe their property is too old or they have not owned the property long enough. The reality is, it is worthwhile making a claim on any property,” said Mr Beer.
Requesting a Tax Deprecation schedule that outlines what claims are available for a property owner can make a significant difference. For many investors, Depreciation can be the difference between a property which has a negative cash flow and turning the property into a positively geared asset. “On average, most investors can claim between $5,000 and $10,000 in deductions in the first full year for any residential investment property,” said Mr Beer.
This is no small amount, so for any investors wondering what property Depreciation is, why to claim it, and how to go about making a claim, the following points will answer some of the most common questions asked by property investors.
1. What is depreciation?
Depreciation is a non-cash deduction the Australian Taxation Office (ATO) allows the owner or owners of an investment property to claim a deduction due to the wear and tear of a building structure (capital works deduction) and its fixtures (plant and equipment Depreciation) over time. Depreciation is described as a non-cash deduction, meaning the investor does not need to spend any money to be able to claim it.
2. No property is too old
An investment property does not need to be new to be able to claim Depreciation. Though ATO legislation states that owners cannot claim capital works deductions for any residential property in which construction commenced prior to the 15th of September 1987, there are no date restrictions for a claim for the Depreciation of plant and equipment assets contained within the property. On average, 15% of the total construction cost of a residential property is made up of plant and equipment, so it is always worth making an enquiry.
Revising past tax returns If a property owner has not been claiming Depreciation or maximising their deductions, two previous year’s tax returns can also be adjusted and amended.
3. Deductions are available for 40 years
The ATO has determined that any building eligible to claim the building write-off allowance has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years Depreciation on a brand new building, whereas the balance of the 40 year period from the construction date is claimable on an older property.
4. Claim Depreciation for renovations
When renovation work has been completed to a property or is in the planning stages, it is essential to contact a specialist Quantity Surveyor and request a site inspection of the property. Additional deductions may be available for any capital improvements done to a property. Often when renovations have been completed by a previous owner of the property, the additions may not be obvious. A site inspection of the property will allow a Quantity Surveyor to discover any work that has been completed, including non-visible assets like plumbing, water proofing and electrical wiring. The Quantity Surveyor will then estimate the deductions available from any assets or structural additions that have been made within the qualifying dates and calculate the Depreciation accordingly.
Assets scrapped If an owner is planning on doing any renovation work to their property, an inspection should be performed both before and after the renovation work is complete. The owner may be entitled to claim additional deductions for any remaining depreciable value of assets or structures removed from the property and written off in the year the items are removed.
5. Use a qualified professional
Quantity Surveyors are qualified under the tax ruling 97/25 to estimate construction costs for depreciation purposes. They have access to the latest information and resources through their accreditations.
Whilst we work with a number of Quantity Surveyor organisations, we have found that the service and reports issued by Mr Beer’s BMT Tax Depreciation to be thorough and extensive. They also offer a valuable obligation-free advisor service at 1300 728 726 should you have any queries or concerns about whether commissioning a report on your property is worthwhile.
If you want to know more about available Depreciation tax deductions, contact us on 03 9585 7555 oremail us.