What you Need to Know About Investment Property Depreciation.
One of the best property investment tax breaks available, Investment property depreciation can be claimed against the assessable income of anyone who purchased their property for investment purposes.Australian Taxation Office (ATO) allows hundreds of investors save a lot of money on tax deduction, increasing returns on their residential investment property, every financial year.
In order to receive some substantial savings by claiming depreciation, you simply need to arrange an inspection of your property with a qualified quantity surveyor who will then provide you with a depreciation schedule. If you’re interested in investing in property in Australia, the MRE team is here to help you understand what depreciation means and how it could help you save at tax time.
What Is Investment Property Depreciation?
Investment Property depreciation is used by investors to offset the decline in value of their rental properties against their taxable income. Every property gets older and all assets tend to wear out or depreciate. Rather than claiming depreciation deductions the year you either purchase or improve your investment property, depreciation allows for the deductions to be distributed - scheduled- across the useful life of your property or asset.
The useful life is determined by ATO, as assets have a limited period of time before they need replacement. For each case and investor, a Commissioner will calculate an asset's decline in value aka depreciation for income tax purposes based on extensive ATO guidelines on effective life of depreciating assets. It means for how many years you may benefit from deduction for this asset.
According to reports of companies taking care of property depreciations, during the last financial year, investors are claiming around $9,000 on average over the first year.
What Can I Claim Through Depreciation?
Investors can claim tax deductions for the assets' decline in value of the building structure as well as all of the plant and equipment assets such as dishwashers, ovens, floor coverings, and more. Both old and new property are eligible for tax deductions. Plus, sometimes you can even claim all missed deductions for the past 2 years.
While only properties which were built after July 1985 qualify for both of these deductions, the savings can still be quite significant for older properties as they can still claim depreciation for plant and equipment assets.
You can’t depreciate the land itself or any activities that are considered as part of the land, such as any costs incurred for planting, clearing, demolishing or landscaping.
The depreciation can be claimed under two categories – capital works and plant and equipment assets.
Capital works deductions apply for the actual construction costs and fixed structures, roof, walls, doors. It may be spread over 40 years according to ATO. The standard depreciation rate for building cost is 2,5%.
Example, if it cost you $500,000 to build your tax deduction every year it would be $12,500 per year. Keep in mind that the total claim is limited to the cost of construction and you need to hire a professional to calculate it.
Plant and equipment assets refer to all items mechanically or electronically operated and everything inside the house. This includes light fittings, carpets, oven, curtains, washing machine, ceiling fans and many more. According to ATO ceiling fans, as an example, have a lifetime of 10 years, as well as a carpet. Most furniture fall into this category too and can be claimed over 5-10 years. In total, ATO lists have more than 6,000 different depreciable assets!
Sometimes the regulation allows depreciation for common property such as lifts and swimming pools.
How to Claim Depreciation on My Rental Property?
To claim your investment property depreciation you can only contact a specialist and follow the process with him to get your personal tax depreciation schedules that will become your roadmap for all following years.
The Quantity surveyor, accredited with the Australian Institute of Quantity Surveyors, will calculate your possible depreciations using one of the two methods: prime cost method or diminishing value method.
Prime Cost means your claim will be fixed each year and will be calculated as a percentage of original value.
Diminishing cost method accounts for the useful life of all items, which means you will receive more deductions during the first few years and then it will be reduced each year.
The items worth less than $300 can be claimed as immediate deductions.
Keep all the records regarding costs and renovations and talk to your tax adviser as soon as possible.
How Do I Get A Tax Depreciation Schedule?
If the construction costs for your investment property is unknown and/or it was built after July 1985, it is an ATO requirement for a qualified quantity surveyor to schedule a site inspection and create your depreciation schedule. The quantity surveyor measures, documents, and photographs all aspects of your property that are eligible for deductions.
You only get one schedule per property, the only adjustments you may need are if there will be any major renovations.
How Much Does A Depreciation Schedule Cost?
Preparation costs for a depreciation schedule will vary depending on many different factors, from the type of investment property, how big it is, where it is located, and other factors. The majority of leading quantity surveyors have a money back guarantee which would save you double your fee in the first year, or the schedule is provided for free.
The price may vary between $400 to $715 for a quality report and full schedule, however there is no standardized price and you need to contact different companies to get a quote.
Don’t forget that fees charged by quantity surveyors are 100% tax deductible, so you literally have absolutely nothing to lose and only deductions to gain.
When Should I Get A Depreciation Schedule?
You should arrange quantity surveyors to create a depreciation schedule for your investment property immediately after settlement. Arranging a site inspection for as soon as the property is settled is the best way to ensure that your depreciation schedule has the most accurate values, as well as reducing disruptions if you have tenants moving in.
Depreciation reports for income-producing properties should also be created both before and after any scheduled renovations are done because they can often provide significant deductions in tax.
Normally, it takes around two-three weeks to complete a detailed schedule.
If you didn't get a schedule as soon as the deal was settled, you have up to 2 years to still get it and claim all deductions for the past two years.
Can I claim depreciation on old properties?
The simple answer is yes, you can still claim a 2.5% depreciation on capital works on old properties built after 17 July 1985 each year until the property is 40 years old. There are NO time limitations to claim tax breaks on depreciating assets i.e. fixtures, watching machines and fittings.
It is important to mention that from 1 July 2017, only new plant items that you have bought for your rental property are eligible for deductions. Second hand or used by previous owners, plant and equipment items are not eligible.
Can I claim depreciation on renovations?
Yes, you can claim investment property depreciations on substantial renovations, however you will have to keep all records of costs and invite a surveyor to inspect the renovated property and adjust your depreciation schedule.
If your property was purchased after 2017, make sure all items are brand new, as again, a second hand oven or dishwasher will not be eligible for deduction. Same applies if you purchased a property that’s been renovated by the previous owner who had lived in it for six months or a year prior to the sale. None appliances will be eligible for deduction as they were previously used. Even if you will be living in the property while renovating it, it will still be considered previously used.
If you are buying a renovated property, and you want to claim tax deductions, be sure the property was renovated for selling, nobody lived in it during renovation and the works are qualified as substantial, not cosmetic.
If you bought the investment property before 9 May 2017, and plant and equipment items are part of the property, you can claim depreciation.
Your quantity surveyor will decide on each item, including roofing, plumbing, etc.
Investment Property Depreciation FAQ
What is the depreciation rate for investment property in Australia?
Since 1987, the depreciation rate for construction costs for residential property in Australia has been 2.5% for 40 years. Non residential property also benefits from the rate of 2.5%. Traveler accommodation and manufacturing properties have a rate of 4% according to some changes made in 1992.
Can you claim depreciation on an investment property?
Absolutely! Both new and old investments properties are eligible to claim a depreciation for building costs or some depreciating assets.
All regulations are set by ATO and all Quantity surveyors and tax deduction advisors know them. You can also download all guidelines via ATO official website to have an idea of what is claimable.
How do you calculate depreciation on a rental property?
You can use an online calculator to get a very rough estimate, but to get a proper depreciation schedule and detailed list of claims, ATO obliges investors to hire an accredited Quantity Surveyor. He will prepare a report in 2-3 weeks and calculate all deductions you can claim every year.
Why would you not depreciate a rental property?
The main catch with depreciation is that investors will need to reduce the property cost base (thereby increasing the capital gain) by the building depreciation they have claimed when they decide to sell the rental property.
How much depreciation can you claim on investment property?
The amount you can claim is not a fixed payment. The depreciation is calculated in each case individually and will vary based on the specific property, building costs, equipment and furniture you bought, as well as when you purchased the property.
If your rental property was built after 1987 you will be able to claim 2.5% of your building cost over 40 years of your ownership. For instance, if you spent $250,000, you can claim and get $6250 every year. Plus, your surveyor will calculate how much deductions you may get from plants and equipment.
To Sum Up
Depreciation is a valuable method of reducing your tax obligation each year so that the purchase cost of your investment property can be spread out over decades. Just be aware that if you sell your property for more than the depreciated value, you will need to pay depreciation recapture tax for the gain.
MRE team can help you find a trustworthy certified tax specialist and Quantity Surveyors to create a depreciation schedule. Ask us today about how save you from losing money every year or even claim some missed opportunities.