With the potential to boost monthly income while providing the opportunity to re-sell at a higher value later down the line, property investment is a popular choice for savvy investors. But, to take full advantage of all the benefits property investment has to offer, a little know-how goes a long way.
While it may be something of a mystery to some property investors – particularly first-time property investors – depreciation is not something to be ignored. Rental property depreciation is often overlooked, but if you do this, you may also be overlooking many thousands of dollars in tax deductions. The solution? An investment property depreciation schedule.
What is property depreciation?
Before we get into depreciation schedules, let’s go back to basics with a little Property Depreciation 101. As an investment property gets older and the items within it suffer wear and tear, it declines in value. To allow for this, the Australian Tax Office (ATO) lets investors claim this loss of value as a tax deduction against their assessable income. This is property depreciation.
Why can’t you claim depreciation on a primary place of residence? This is due to the fact that you don’t earn income on your home as you do on an investment property, so if it’s not income producing, it’s not eligible for depreciation.
When calculating depreciation for tax purposes, an item is allocated a cost over its useful life. So, if for example, you have a television in your rental property that is valued at $1,000 and has a 10-year life, it’s possible to claim $100 against your taxable income for 10 years on that individual item. However, keep in mind, you’re only allowed to claim depreciation on certain items.
In terms of rental property deductions, there are two types of depreciation you can claim, building allowance or plant and equipment. Claiming depreciation on buildings or ‘building allowance’ allows you to claim on the construction costs of the building itself, including the brickwork and concrete. While ‘plant and equipment’, refers to items within the building, such as carpets, curtains and hot water heaters.
What is a tax depreciation schedule?
To claim depreciation on your investment property, you need an investment property depreciation schedule. This schedule is prepared by a qualified quantity surveyor, listing all your investment’s depreciable items, including the effective life (amount of wear) left in each item, and the dollar value you can claim against your assessable income.
Why must it be prepared by a quantity surveyor? As they are one of the few professionals recognised by the ATO to have the appropriate skills to calculate the cost of items for the purpose of depreciation, quantity surveyors are trusted to produce tax depreciation schedules. Unfortunately, the ATO will not just take your word for it. A professional’s judgement is required.
Your tax depreciation schedule will include depreciation on both building allowance and plant and equipment, identifying each depreciable item, alongside accurate calculations regarding its value and effective life. The depreciation schedule will also capture any renovations made to the property since its initial construction.
A depreciation schedule for rental property is generally only prepared once – unless you choose to undertake major renovations to the property, in which case, you may be able to claim those renovations. You may even be able to claim depreciation on renovations completed by the previous owner. As for any small improvements to the property, you can forward your receipts to your accountant, who will then incorporate these additions into your existing schedule.
As each property differs from the next, the amount you may claim on depreciation will differ depending on your investment property, its age, its condition, and what it holds. However, knowing more about rental property depreciation may allow you to deliberately choose properties in the future that provide you with the greatest depreciation benefits.
The cost of preparing a property depreciation schedule will vary according to the type of property, its location, size and numerous other factors. However, it’s worth bearing in mind that while you will need to pay to have your property depreciation schedule produced, it may save you thousands of dollars in tax deductions. On top of that, quantity surveyors’ fees are 100% tax deductible.
What can you claim?
With all that in mind, what can you claim?
Depreciation on building allowance
Claiming depreciation on building allowance, is the deduction available for a building’s structure and any fixed assets. In terms of the building’s structure, this could include the property’s brickwork, timber work, roof and footings. Fixed assets are generally described as items that can’t be easily removed from the property, such as plumbing fixtures and built-in cupboards.
Depreciation on building allowance is only applicable to properties of a certain age, set at a flat rate of 2.5% per annum in most cases, claimable over 40 years.
Depreciation on plant and equipment
As for depreciation on plant and equipment – or any item that can be picked up or easily removed from a residential investment property – these can make up to 35% of the overall cost of a residential building. While the ATO uses a flat 2.5% for building allowance depreciation, it stipulates items that fall under ‘plant and equipment’ lose value at varying rates.
To account for this, the ATO has defined the ‘effective life’ for more than 1,500 assets. As there are so many types of depreciating assets, low cost assets (items costing between $300 and $1,000) can be grouped together into a ‘low value pool’, attracting a higher depreciation rate. Items costing less than $300 may be written off in the year of purchase.
As an investment property owner, you may deduct the depreciating value of the property and the items within it. But, it’s your job to claim it. The ATO will not remind you to do it, and while your accountant can assist in the preparation of your tax return, you will need to engage the services of a qualified quantity surveyor to create a depreciation schedule for your investment property.
By reducing taxable income, depreciation can improve cash flow. When claimed correctly, depreciation can make your property investment more viable and easier to manage, while freeing up cash for further investment opportunities to build your wealth, such as those on offer at Trilogy.
Is it time to expand your investment portfolio? Think bigger than direct property ownership. Learn why more investors are choosing mortgage trusts or check out the 6 things you need to know about unlisted property trusts.
This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425. This advice is general advice only and does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.