What Is Tax Depreciation and What’s In It For Me?
An investment property is a lot like a business, and as with any business, tax is a key component. Some savvy investors will actually consider depreciation before they purchase their investment. However, many investors overlook the value of tax depreciation in their investment and miss out on potentially thousands of dollars. So what is it all about? Here’s everything you need to know about tax depreciation for your investment property.
What is it?
Basically, tax depreciation allows you to claim wear and tear on items and decline in value of investment property as tax deductions against your assessable income. Just as interest payments and property maintenance are tax deductions, so too is the depreciating value. If you’re unfamiliar with the process, there are two types of allowances available: depreciation on Plant and Equipment, and depreciation on Capital Works. Simply put, Plant and Equipment refers to items inside the property, such as appliances, blinds and carpet, while Capital Works relates to the structure, permanent fixtures and associated costs of the building itself. You can offset both of these costs against your taxable income.
Is it worth it?
Put it this way, when you make a purchase at the supermarket, do you stick around to receive your change? Of course you do! Because it makes no sense to pay more than you should, and the same principle applies to depreciation. The major benefit of claiming depreciation on tax is that it reduces your taxable income, therefore improving your cash flow. While this alone is not a reason to invest, it certainly has the potential your property investment easier to manage and build a portfolio faster. Calculating the depreciation on assets can be a little complex, as they depreciate at different percentages, but investing a small amount of time could give you a large amount of savings. However, due to the rules and in-depth requirements of the process, it is advisable that you seek advice and assistance from qualified professionals.
What do you need to do?
If you are not currently claiming tax deductions for depreciation on your investment property, there’re a few things to know. Firstly, you are allowed to back claim up to two years of tax returns to amend for depreciation. Anything prior to this is a loss you’ll unfortunately have to wear. It’s also important to note that you can only claim depreciation if you know the original construction costs. This is obviously an issue if your property is not brand new, but there is a solution: a tax depreciation schedule.
How do you get a schedule?
A qualified and accredited quantity surveyor is a specialist in the accurate measurement of construction costs and can inspect the property to gather necessary information for a tax depreciation schedule. Of course, there is a fee for the inspection, which varies depending on the property. But the good news is that it’s 100% tax deductible. If your property was built after July 1985, you can claim depreciation on both Capital Works and Plant and Equipment. However, any properties build after this date can only claim depreciation on Plant and Equipment. But it will still be worthwhile.
The bottom line
The bottom line is that depreciation will help improve your bottom line at tax time (see what I did there?) Anyone who owns an investment property is entitled to claim depreciation on the building costs and items within the property. And while you can back claim up to two years on tax returns through your accountant, in order to obtain a depreciation schedule, you will need a quantity surveyor to provide an estimate of constructions costs to meet the requirements of the Australian Taxation Office.