Just as you can claim wear and tear on a car purchased for income-producing purposes, you can also claim the depreciation of your investment property against your taxable income.
Seasoned property investors know all about this one. In fact, some will take depreciation into account before purchasing their next investment. But it’s not just for the pros. Anyone who purchases a property for income-producing purposes is entitled to depreciate the building and the items within it against their assessable income.
Seasoned property investors will take depreciation into account before purchasing their next investment.
But others are none the wiser, which means that, every year, thousands of dollars go unclaimed.
To make substantial savings, all property investors need to do is arrange a qualified quantity surveyor to inspect their home and prepare a report for their accountant.
So for anyone who’s unfamiliar with the process: it pays to learn.
Here’s a basic guide to lead the way. Let’s call it Deprecation 101.
1. What is property depreciation?
There are two types of allowances available:
- depreciation on Plant and Equipment;
- and depreciation on Building Allowance.
Plant and Equipment refers to items within the building such as ovens, dishwashers, carpet and blinds.
Building Allowance refers to construction costs of the building itself, such as concrete and brickwork.
Both these costs can be offset against your assessable income.
2. So how does a depreciation schedule help me?
Simple. A depreciation schedule will help you pay less tax. The amount the depreciation schedule says you claim effectively reduces your taxable income.
A depreciation schedule will help you pay less tax.
Depreciation is known as a “non-cash deduction” because it’s the only deduction that you don’t have to pay for on an ongoing basis; the deductions are in-built within the purchase price of your property. All other deductions, such as interest levies, will hurt your hip pocket on an ongoing basis.
3. Is my property too old to claim depreciation?
The simple answer is no. If your residential property was built after July 1985, you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment. But it will still be worthwhile.
Commercial and industrial properties are subject to varying cut-off dates.
Here is a chart showing the relevant timelines for differing types of construction.
4. Shouldn’t my accountant prepare this report?
If your residential property was built after 1985, your accountant is not allowed to estimate the construction costs, nor are real estate agents, valuers or solicitors.
According to Tax Ruling 97/25, issued by the Australian Taxation Office (ATO), quantity surveyors are appropriately qualified to estimate the construction costs, when those costs are unknown.
According to Terry Aulich, Chief Executive Officer of the Australian Institute of Quantity Surveyors (AIQS), while accountants can offer general advice on other aspects of tax depreciation, construction costs and property depreciation are domains that require highly technical expertise.
“Quantity surveyors are specialists in the accurate measurement of construction costs with a view to maximising a client’s financial position in relation to their property assets. Only a fully-qualified quantity surveyor brings the appropriate education, experience and training to provide reliable figures upon which to base a property tax depreciation schedule,” says Terry.
“One doesn’t want to rely on best guesses when dealing with the ATO – especially when there is professional help available.”
Terry also suggests that clients should check the credentials of anyone claiming to be a quantity surveyor. He recommends that the first question clients should ask their quantity surveyor is whether they are a member of the AIQS, as membership indicates that a quantity surveyor has completed an accredited qualification.
5. Will you need to inspect my property?
The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements.
A trained quantity surveyor will ensure all depreciable items are noted and photographed. This guarantees you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit.
It’s very common for quantity surveyors to liaise directly with the tenant or property manager in order to cause minimal disruption to the tenant. The best time to get a quantity surveyor to inspect your property is immediately after settlement and hopefully just before the tenant has moved in.
6. My property is renovated. Can I still claim?
Yes, but you will need to know how much you spent on renovations. Providing this information is an ATO obligation.
If the previous owner completed the renovations, you are still entitled to claim depreciation.
In either case, where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation.
7. How much will my depreciation schedule cost?
The cost of preparing a tax depreciation schedule varies according to a number of factors, including the type of property you’ve purchased, its location and size.
Most of the leading quantity surveyors offer a money back guarantee to save you twice your fee in the first year, or they give you the report for free.
So you have absolutely nothing to lose – and many deducations to gain.
To sweeten the deal further, quantity surveyor fees are 100% tax deductible.
8. How much will I save?
Each property is different and many factors must be considered when preparing a property depreciation schedule. There are several depreciation calculators on the market, many of which can be found easily through a Google search for “depreciation calculator”.
Don’t pay for a property depreciation estimate; in my opinion, the best ones are free.
9. How long will it take to complete my schedule?
Your depreciation schedule will take approximately 2-3 weeks to complete, as long as the quantity surveyor can inspect your property without delay.
10. I bought my property 3 years ago. Can I still make a claim?
Yes, you can. Your accountant can amend your previous tax returns as far back as two years ago. There are some exceptions, so contact your tax agent or the ATO for clarification.