Ensure Investment Success by Claiming Property Depreciation
At the beginning of a new financial year, it’s a great time to make your investment plans for the future.
For property investors this might involve purchasing a new property to start or build on an existing portfolio or time to take stock of whether there are any areas you can improve on the cash flow you are receiving from your property.
One of the areas where additional cash flow can be achieved is by taking advantage of the depreciation deductions available.
According to the Chief Executive Officer of BMT Tax Depreciation, many investors are missing out on these valuable deductions.
“Research shows that 80 per cent of investors fail to maximise deductions available from depreciation,” said Mr Beer.
To take advantage of depreciation deductions, Bradley recommends obtaining a depreciation schedule from a specialist Quantity Surveyor.
“Quantity Surveyors are qualified under the tax ruling 97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules,” said Mr Beer.
“To provide a comprehensive depreciation schedule, a depreciation expert will perform a detailed site inspection that outlines all of the deductions available.”
For investors wanting more information, below are four helpful facts about depreciation.
1. What is depreciation?
Over time, any building and the assets contained within it will experience wear and tear. Legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation. Unlike other expenses involved in holding a property, such as repairs and maintenance, an investor does not need to spend any money to be eligible to claim it. For this reason, depreciation is often described as a non-cash deduction.
2. There are two types of depreciation available
The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors to claim:
The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.
As a general rule, any residential building where construction commenced after the 15th of September 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to forty years.
Owners of older buildings constructed prior to 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.
Plant and equipment depreciation on the other hand, refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property.
There are more than 6,000 different assets recognised by the ATO which an investor can claim depreciation deduction for. Some examples include the carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.
Unlike structural items, no date restrictions apply when claiming depreciation on plant and equipment assets. Each of the assets is assigned an individual effective life and depreciation rate by which depreciation should be calculated.
3. What if you haven’t been claiming depreciation?
Investors who haven’t been claiming or maximising depreciation for their investment property can request their previous two financial year’s tax returns to be adjusted.
4. Claiming depreciation can save thousands
On average, investors can claim between $5,000 and $10,000 in depreciation deductions within the first full financial year alone. These deductions essentially allow an investor to reduce their tax liability and therefore they could improve their annual tax return or avoid having to pay additional taxes. The additional cash flow generated from depreciation can be vital to help investors cover the costs involved in holding their property and to help them to save and invest further in the future.
To see an example scenario which shows the difference depreciation can make for you, visit BMT Tax Depreciation’s property investor case study page by clicking here.
If you’re looking to invest in property, depreciation is something you might want to explore. It can be a solid investment strategy if you choose a property wisely and seek good financial advice.
The cost of your home loan can drastically affect your financial planning, so it pays to speak to the experts about it. You can contact us for advice about the best options for you when it comes to your mortgage.
Click here to speak to us!
Article provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.