Depreciation can offer significant tax breaks to property investors, yet many fail to take full advantage of the savings available to them.
In this article, we’ll look at some points you need to know about tax depreciation to help with your deductions.
What type of deductions can I claim?
There two basic types of depreciation allowances available to investors:
- Division 43 capital works deduction.
- Division 40 plant and equipment depreciation.
Capital works deduction, also known as the building write-off, refers to the deductions available on your property’s structure, including renovations.
Plant and equipment deduction refers to the deductions you can claim for items within your property – things like carpets, blinds, curtains and appliances.
The good news is that while only properties built after 15 September 1987 qualify for both types of deductions, there’s no time limit for plant and equipment items – items that can have a big impact on your depreciation. While it’s true that most newer buildings will have higher depreciation value due to more recent construction costs, older properties can still offer significant savings to investors.
Does my property qualify for deductions?
Most properties – no matter what the age – qualify for some level of depreciation, which means that the bigger question for investors is if there are enough deductions to justify going through the process of creating a formal depreciation schedule.
It’s here that a quantity surveyor can be of help. By asking a few basic questions about your property, a qualified quantity surveyor will be able to identify your building’s depreciable items and give you a reasonable indication of the amount of depreciation available. With this information, you can make a more informed decision about whether it’s worth paying for a depreciation schedule before you go ahead and do it.
Because many investors rely on guesswork or frequently overlook depreciable items in their properties, it’s estimated that up to 70 to 80% fail to maximise their deductions each year.
What about renovations?
As long as your property’s an investment property and not used a principal place of residence, you’re entitled to claim depreciation on all renovations completed after 15 September 1987 – including renovations made by and paid for by previous owners.
Specifically, you’re entitled to claim 40 years’ worth of deductions on building renovation costs at a rate of 2.5% per annum, as well as depreciation on plant and equipment items for the period of their useful life span. So, even if you don’t qualify for other types of deductions due to the age of your property, more recent upgrades or additions (such as a new kitchen or patio), can significantly change the equation.
In order to claim depreciation, you’ll need a depreciation schedule. According to the ATO Tax Ruling 97/25, if your property was built after 15 September 1987 or the actual costs of construction aren’t available, you’ll need to hire a relevant professional, such as a quantity surveyor, to create the depreciation schedule for you.
As an investor, maximising your depreciation can help put more money in your pocket at tax time. Since most reputable quantity surveying companies place a money-back guarantee on the value of their services, it pays to call an a specialist quantity surveyor and get their advice.
Brad Beer, BMT Tax Depreciation, Realestate.com.au, 21 July 2015