Investment Property Depreciation 101

When it comes to taxes, depreciation will benefit your bottom line.

You can take a deduction from your taxable income equal to the amount of depreciation that your investment property has accrued in the same way that you can take a deduction equal to the amount of wear and tear that a car that you acquired to produce revenue has accrued.

A wonderful approach to reduce your tax liability and increase cash flow returns is to claim depreciation on an investment property. However, it's crucial to accurately claim depreciation on an investment property.

When you claim too little, you miss out on potential opportunities to save money on your taxes. On the other hand, when you claim too much or file your claim incorrectly, you run the danger of being accused of tax fraud and paying large fines. In this essay, we hope to demonstrate how to correctly claim depreciation on an investment property so that you can save money.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Property investors with experience are well aware of this. In fact, some people will consider depreciation while making their next investment decision. However, it's not just for experts. Anyone who buys a property with the intention of using it to generate revenue is allowed to deduct the cost of the building and all of its contents from their taxable income.

Before making their next investment, seasoned real estate investors will take into account the property's rate of depreciation.

However, others are oblivious, which results in thousands of dollars being lost every year that could have been claimed.

To make significant cost reductions, real estate investors need merely retain the services of an experienced quantity surveyor to conduct an inspection of their property and compile a report for their accountant.

Your requirements for investment depreciation can be met by the financial experts at Klear Picture, who would be happy to help.

What is property depreciation?

Property depreciation is a tax deduction that enables investors to deduct the loss in value of an investment property from their taxable income.

Australian law permits investors to deduct taxes on both the fall in the value of the building's structure and other objects that are thought to be permanently fixed to the property as well as the decline in value of the property's plant and equipment assets (think ovens, dishwashers, carpets and blinds).

In addition to assisting you in paying less tax, it is also a "non-cash deduction," which means that you do not need to make continuous payments for it because the deductions are included in the amount you paid for your property. All other deductions, such as interest levies, will continuously harm your wallet.

Methods of calculating depreciation

Your depreciation claim can be calculated using one of two approved techniques.

According to the Diminishing Value Method, the claim's value declines by a specific percentage per year. You can therefore make a larger claim in the first year and a smaller one in later years. This is due to the fact that objects lose value immediately when they are fresh and gradually as they age.

The Prime Cost Method determines a predetermined claim amount as a portion of an item's original cost or value. As a result, your claim will remain the same every year the item is in use.

Discuss the two procedures above with your accountant or quantity surveyor to determine which will be appropriate for the claims pertaining to your investment property.

Which depreciation on my investment property may I claim?

You may deduct one of two types of depreciation from an investment property:

Building 

Expenses incurred during the building's construction. Products such as masonry and concrete are examples. It is common practise to ignore the depreciation claim that should be made for buildings, plants, and equipment. In most cases, you are permitted to make a claim for a modest portion of the total cost of the building and other fixed structures located on the land over the course of its ownership.

In most cases, the rate is 2.5% from the time the property is erected onward, the total claim cannot exceed the cost of construction, and you are required to hire a quantity surveyor to help you with the calculations.

Taking those steps for such a meagre outcome might not seem worth the trouble at first, but consider the following. If you purchased a home in today's market for $600,000 and it originally cost you $250,000 to build it in the year 2000, then you may be eligible to deduct an additional $6,250 each year against the rental income until the year 2040.

What if the house were instead an off-the-plan, newly built apartment? If it cost you $600,000 today with total building costs of $400,000 – then there are some big claims you could make of $10,000 per year.

Claiming building depreciation can be challenging because there are so many complex variables at play.

Because of the gradual implementation of depreciation in Australia throughout the course of time, it is necessary for properties constructed during various time periods to have their claims evaluated differently. There is no single method that can be used for all of the attributes.

Before you can file a claim for building depreciation, you need to be aware of the following:

Beginning of construction

Depreciation percentages are computed using the property's construction start date. Various properties built during different eras can make different depreciation claims.

End of construction date

Depreciation claims cannot be made until after construction has been completed, even if depreciation rates depend on the date work began. So it's crucial to be aware of this date.

Building costs

This is not the price paid to acquire the property or its market value. This represents the property's actual construction costs at the time of construction.

If you are unsure of the construction cost for taxes purposes, a quantity surveyor can make an estimate.

The nature of the building

• Was the property a house, a townhouse, an apartment, a commercial building, etc.?
• Who performed the construction?
• Was the person an owner, a builder, or a developer?

Any information you don't have or are unsure of can be found with the assistance of a quantity surveyor. The building component of your claim will subsequently have a depreciation schedule made for you. If you don't want to compute it yourself, this is the simplest method to use.

Claiming Improvement in Structure

If building on a residential property started after February 26, 1992, you can also deduct the cost of structural upgrades.

Remember that depreciation law was implemented gradually, which explains why there are so many different dates and why it can be so difficult to understand.

Plant and Machinery

Items such as carpeting, light fixtures, blinds or curtains, ovens, dishwashers, and other interior fixtures. Despite popular belief, garden plants are rarely refundable.

You must have what is referred to as "a depreciation schedule" prepared in order to legally claim depreciation on your property. The report that details all of your tax-deductible depreciation is this one.

Just wait till you try to calculate your plant and equipment depreciation before you realise how difficult building depreciation is.

The Good News First

Even truly old homes built before 1979 are eligible to claim depreciation on their plant and equipment, which is some good news for homeowners.

You can claim a tax deduction for the cost of depreciating many home improvements, such as blinds and carpets, over the course of their useful lives.

Now For Some Terrible News

In accordance with the tax legislation, the commissioner is the one who determines the effective life of claimable objects, and this life is subject to change over the course of time.

This indicates that you will need to establish which tax ruling, or the schedule that is associated with the applicable tax decision, you will be utilising for the effective date of each individual item.

Because some things, like an oven, may not last as long as others, like carpet or curtains, it is imperative that every asset be valued according to its individual rate of depreciation.

Now for the good news: Items That Can Be Reclaimed Right Away

There are certain products that allow you to quickly claim the whole cost without having to take into account depreciation.

Products with a price tag of less than $300 - Suppose you buy a new microwave for your tenant for a total of $200. You are not required to take into account the item's declining value over the course of time and can write off the entire $200 in the same tax year that you bought it.

NOTE: A collection of things, such as dining chairs, is treated as a single asset when it comes time to record the assets. Since the set of four dining chairs only costs $360, and even though each chair may only cost $90, the chairs must still be depreciated even though the set's total cost is only $360.

Items having a value of less than $1,000 Each participant in the "low-value pool" may contribute items with a value that is less than $1,000. There is not a single item in this collection that is worth more than one thousand dollars.

Anything that is contributed to the pool will start to lose value beginning in the year it is contributed, at a rate of 18.75% loss each year thereafter. After the initial year in which it is added to the pool, the annual rate of depreciation that is applied to an item decreases to 37.5% for the course of its useful lifetime.

If you do this, you can avoid the time-consuming and laborious task of computing the depreciation of each and every minor item that you have on the property individually. Calculations are greatly simplified as a result of using it.

Everything that is worth more than one thousand dollars The asset's effective life should be utilised to calculate how much of the asset should be depreciated. Following the completion of the calculation, the item is often claimed at a rate of return that is decreasing (depending on its effective life).

After being determined individually up to that time, an item is often included to the "low-value pool" whenever its value falls below $1,000 and becomes eligible for inclusion in that category.

Is my property too old to claim depreciation?

Simple no is the response. You may claim both Building Allowance and Plant and Equipment if your residential property was constructed after July 1985. Only plant and equipment may be depreciated if building on your property began before this date. But it will be worthwhile nonetheless.

Different deadlines apply to commercial and industrial establishments.

You may get all the assistance you need with investment property with Klear Picture Property Advisors.

Shouldn’t my accountant prepare this report?

Your accountant, real estate agents, valuers, or solicitors are not permitted to estimate the construction costs if your residential property was built after 1985.

Quantity surveyors are sufficiently equipped to estimate the building costs when those prices are unknown, according to Tax Ruling 97/25, published by the Australian Taxation Office (ATO).

While accountants can provide broad guidance on other areas of tax depreciation, Terry Aulich, Chief Executive Officer of the Australian Institute of Quantity Surveyors (AIQS), claims that building costs and property depreciation are fields that demand highly technical competence.

Quantity surveyors are experts at accurately estimating construction costs with the goal of improving a client's financial position relative to their real estate assets. Only a quantity surveyor who is completely qualified has the necessary education, expertise, and training to deliver accurate figures for a property tax depreciation plan.

When dealing with the ATO, one shouldn't rely just on best assumptions, especially when expert assistance is readily available.

Additionally, Terry advises consumers to verify the credentials of anyone posing as a quantity surveyor. He suggests that clients should enquire about the AIQS membership of their quantity surveyor as soon as they hire them, as this shows that they have successfully completed a recognised qualification.

My property is renovated. Can I still claim?

Yes, however you will need to be aware of your renovation costs. ATO is required to provide this information.

You may still claim depreciation even if the prior owner finished the renovations.

The ATO has designated a quantity surveyor as being properly qualified to provide that estimate in either scenario when the cost of renovation is uncertain.

How much will my depreciation schedule cost?

The price of creating a tax depreciation plan varies depending on a variety of variables, such as the kind of property you've bought, where it is, and how big it is.

The majority of top quantity surveyors provide you the report for free or offer a money-back guarantee that will allow you to save twice as much money in the first year.

As a result, you have nothing to lose and a lot to gain.

The cost of hiring a quantity surveyor is completely tax-deductible, which makes the offer even better.

How much will I save?

When creating a property depreciation schedule, a variety of elements that are unique to each property must be taken into account. Many of the depreciation calculators available on the market may be easily accessed by performing a Google search for "depreciation calculator."

The best property depreciation estimates, in my opinion, are free, so don't pay for one.

Your trusted investment property advisors in Melbourne are Klear Picture.

What Amount Of Depreciation Can I Recover?

The value of individual properties declines at varying rates throughout time. In most cases, the amount of depreciation that can be claimed will be higher for properties that are more recent.

In more recent properties in which everything is freshly installed, you may very well be able to gain tens of thousands of dollars in depreciation that can be claimed. You could still be able to claim a few thousand dollars worth of depreciation on your plant and equipment for older buildings.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Is It Worth It To File A Claim For Depreciation?

After learning about depreciation, it is crucial to consider whether or not it is worthwhile to claim it.

I'll give you a few examples, and you can make the determination after that.

If you can deduct only $3,000 in expenses and your tax rate is 30%, you will probably avoid paying $900 in taxes.

30% of $3,000 equals $900.

If you are in the 30% tax rate and can deduct $15,000 in depreciation, you may be able to avoid paying $4,500 in taxes.

30 percent of $15,000 equals $4,500.

Therefore, the majority of the time, claiming depreciation is worthwhile.