Your guide to property depreciation
With the end of the financial year on our doorstep, tax deductions are on everyone’s mind.
If you own an investment property, depreciation is one of the major tax deductions available to you. As your property wears out, you can claim that loss against your taxable income.
Depreciation claims change the amount of tax property investors need to pay on their income. So if your income tax rate is 37 cents to the dollar, and you make a $10,000 deduction on your investment property, you can get $3,700 cash back at the end of the financial year.
Although all property investors hope that their property will increase in value over time, depreciation refers to the physical condition of the materials on that property.
Brad Beer, managing director of BMT Tax Depreciation, explains that depreciation can be applied to any investment property that’s being used for income producing purposes.
“The only thing that’s excluded really is your principal place of residence, because it’s not an investment property,” he says. According to Beer, around 80% of investors are not maximising their depreciation deductions.
Some people believe that depreciation can only be claimed on new properties, where the materials may degrade more quickly. However, Beer explains that this isn’t the case.
“Old property definitely still gets depreciation,” he says. “It doesn’t get as much, it doesn’t last as long. But there is still depreciation there. We should be able to look at it, and ask a few questions about your property, to see if there are any deductions there and it’s worth going through the exercise.
“The age of the property does matter, for certain reasons, for what you’re going to be able to claim. But it’s not a ‘you get it or don’t get it’, it’s a ‘you get a bit more, or you get a bit less’ sort of situation.”
When owners renovate their investment property, there are two opportunities to claim depreciation – before the renovations, and after. Beer says that while many people recognise the need to claim depreciation on new items that they’ve installed – the new kitchen unit, or floorboards, they often forget the materials they’ve scrapped as part of their renovations.
“When you bought this property, if you were using it for rent, or for income producing purposes, you had some items in there that were helping to get that income,” says Beer.
“But if you throw them away before their life runs out, the rest of the value that’s left is potentially an instant deduction, all at once, rather than continuing to depreciate.”
The depreciation deductions available are estimated by a quantity surveyor, who prepares a depreciation schedule.
“A quantity surveyor estimates construction costs, traditionally,” says Beer.
“A tax office will accept the cost estimates of a quantity surveyor for the purpose of depreciation. We work alongside the accountant. The accountant doesn’t estimate construction costs, and therefore uses our numbers as part of the overall tax return, and we help to make sure it’s ATO compliant, and get the maximum deduction for the client.”
A quantity surveyor will visit your property and identify everything that is claimable, to maximise your deduction. As experts in depreciation, specialist quantity surveyors, are able to look the condition of a property and its items, with their costs, and assess the available deductions.
According to Beer, once a depreciation schedule is completed, another report is only necessary if changes are made to the building.
“If you change what’s there, even if you throw away one dishwasher, and put a new dishwasher in, you’re kind of changing the depreciation a little bit,” he says.
“We don’t need to come and visit and look at one new dishwasher. But we may need to adjust the report and we can adjust your tax return.”
For investors who are unsure whether the cost of engaging a quantity surveyor is worth the available depreciation deduction, especially on older properties, Beer recommends getting an estimate from a quantity surveyor before they visit the site, using photographs, estimates of the cost of items, and previous depreciation claims.
“A quantity surveyor should be able to give you a rule of thumb pretty easily on what sort of deductions should be there,” says Beer.
“And normally they should back their work after that, and go ‘If I can’t get some deductions, you shouldn’t have to pay for the report.’”
As accountants use depreciation reports when they’re preparing your taxes, it’s important to consult them about your quantity surveyor.
“By all means, have a discussion with your accountant before you ever engage with a quantity surveyor to do your depreciation schedule,” says Beer. Your accountant may be able to recommend a quantity surveyor to you, or show you examples of reports they’ve worked with before.
For those who have forgotten to claim depreciation in the past, or who have guessed the level of claimable depreciation rather than engaging a quantity surveyor, it is possible to back date your depreciation claims – to an extent. Amendments can be made to tax returns for the past two years, if you haven’t been maximising your depreciation claims. For more information on tax claims related to your investment property, see the Australian Tax Office's website.
