Property depreciation continues to maximise cash flow
Property depreciation is the second biggest tax deduction for property investors after interest, yet 80% of investors fail to take full advantage of it.
With the COVID-19 pandemic placing financial strain on many investors across the country, it’s important that they do all they can to maximise their cash flow.
What is property depreciation?
As a property gets older, its structure and the assets within it wear out – they depreciate. Owners of residential investment properties can claim this depreciation as a tax deduction.
Most investment properties, both new and old, hold lucrative depreciation deductions. Depreciation is a non-cash deduction, this means investors don’t need to spend any money in order to claim it.
How can investors claim depreciation?
Depreciation can be claimed under two categories – capital works and plant and equipment.
Capital works refers to the structural and fixed components of the property. Some common examples are walls, mortar, doors and kitchen cupboards.
Owners of residential investment properties that commenced construction after 15 September 1987 can claim capital works deductions at a rate of 2.5 per cent for forty years.
If an investment property was constructed before 15 September 1987, investors should still enquire about depreciation deductions available as these buildings have often undergone some form of renovation.
Plant and equipment deduction refers to the easily removable fixtures and fittings of the property. For example, carpet, blinds and hot water systems. Depreciation deductions for plant and equipment assets are calculated based on their effective life.
Depreciation for plant and equipment assets was affected by 2017 legislation changes. Under the current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9 May 2017 cannot claim deductions for previously used plant and equipment assets. Owners of second-hand properties can still claim depreciation for any brand new assets installed in the property once it’s income-producing.
It’s important to note that depreciation deductions can be claimed as long as the property is genuinely available for rent. This means that if an investment property is vacant while the owner is searching for new tenants, they can still claim depreciation during this time.
Investors must ensure they claim maximum deductions
A thorough site inspection is essential to achieve the highest possible deductions and to ensure accuracy while maintaining full compliance with the Australian Taxation Office (ATO).
A specialist site inspector will measure the building and floor coverings, note down the construction method, workmanship, materials used and condition of the property. Another important step during a site inspection is to identify as much qualifying plant and equipment assets as possible.
The information gathered from the site inspection is used when completing a tax depreciation schedule and supports deprecation claims in the event of an ATO audit. Only quantity surveyors can calculate depreciation as they are one of the few professionals recognised by the ATO as having the skills to estimate construction costs for depreciation purposes.
An investor’s accountant will use a tax depreciation schedule to determine depreciation deductions for each financial year. If an investor has owned an investment property for several years and hasn’t claimed depreciation, a tax depreciation schedule can help them claim back missed dollars by adjusting previous tax returns.
Depreciation deductions help investors maximise the cash flow from their investment property. If an investor orders and prepays for a tax depreciation schedule before June 30 they can claim the fee straight back this financial year.
