One of the most important parts of owning an investment property is setting up your portfolio so it works for you. This involves research and consultation with experts to make sure the property you purchase will work its hardest for you. A major part in minimising out of pocket expenses is a solid understanding (and to maximise) what deductions and depreciations you can claim come tax time. Read on below to explore what Capital Works depreciation really means and how you can use it to help fund your property investment portfolio.
The depreciation of your investment property is split into two categories: Capital Works and Assets. Capital Works is for the structure of the building and assets which cover plant and equipment within the property. The Australian Taxation Office allows investors to claim depreciation on all residential properties where construction commenced after 15th September 1987 at a depreciation rate of 2.5% per year for 40 years.
A common fallacy many investors fall for is the larger the size of the property, the more deductions they can claim (and more back in their pockets) on depreciation. This is not necessarily the case though. The amount of infrastructure involved with the construction of a property also plays a large role in the amount of deductions one can claim. Whilst a stand alone house may have larger square footage eligible for deductions, units and apartments which have communal property and amenities such as lifts or swimming pools also benefit investors as these shared spaces are factored into the depreciation schedule.
These common areas also allow owners to claim depreciation on plant and equipment assets used in these spaces. According to Bradley Beer CEO of BMT Quantity Surveyors, investors are often surprised at the amount of plant and equipment assets they can use for deductions – “Investors are entitled to claim these assets based on an individual effective life set by the ATO. Items such as carpets, dishwashers, air-conditioning units and even less obvious items like door closers and garbage bins can be claimed by owners of all property types”
According to Quantity Surveyors BMT another major mistake made by investors that results in lost capital works deductions is undergoing a renovation without liaising with a professional Quantity Surveyor. The reason for this is investors may still be entitled to claim deductions on items that have been discarded or upgraded from the property. The ATO has legislated “The remaining depreciable value of any scrapped items can be claimed in the year these items are removed from the property”. However, these deductions can only be claimed if a Quantity Surveyor has produced a depreciation schedule before the renovation of the property.
When it comes to the claiming depreciation on your investment property, it is important to seek professional advice from a Quantity Surveyor and make sure your investment is set up in a way these deductions maximise your investment and partially fund your portfolio.
For more information on depreciation and using deductions to partially fund your property portfolio, contact Solid Investment Property on (03) 9690 2666