Write-offs due to depreciation can greatly impact property investors. Real estate deduction is tax depreciation that allows you to take back the cost of your real estate investment. As an investor, depreciation is one way to reduce your taxable income, saving you a huge amount of money every year.
When it comes to rental expenses such as maintenance and repair expenses, home office expenses, property insurance, mortgage insurance, property management expenses, and other professional services, they can be deducted from the rental income that is earned that year. Compared to these rental expenses, depreciation subtracts the cost of purchasing and upgrading a rental property over its useful life.
How Can You Claim Depreciation?
Property investors can claim depreciation using these categories:
- Capital works allowance (also known as Division 43) covers the value of the structure of the building
- Plant and equipment depreciation (also known as Division 40) covers the worth of removable items
According to the Australian law, you can claim tax depreciation Melbourne on the decline in value of the building structure and those items fixed to the property permanently, as well as on the decline in value of plant and equipment assets inside the property, for example, carpets, blinds, dishwashers, and ovens. Besides benefiting you from paying less tax, you do not have to pay for it regularly because it is a non-cash deduction. Instead, the deductions are put into the purchase amount of your property.
The capital works allowance refers to the claims for the wear and tear of the property structure and the fixed items inside. It typically includes the doors, walls, roofs, bathroom tubs, kitchen cupboards, etc. You can claim these deductions at 2.5 percent rate every year for up to 40 years.
On the other hand, you can claim plant and equipment depreciation for the removable fittings and fixtures in your property. In this regard, ATO confirms thousands of different assets to depreciate. These include smoke alarms, hot water systems, ceiling fans, blinds, carpets, air conditioners, etc. Each of these assets is allocated a depreciation rate and effective life.
Is Your Property Eligible for Depreciation?
It is important to know the type of rental property that is depreciable. Your investment property will only belong to the depreciable category if you use it as a business or to generate income, and you own it regardless if it comes with debt. Also, it is depreciable if your property has a useful life, in which this life is estimated to last longer than one year. A useful life means it will deteriorate over time.
To qualify for tax depreciation, you also cannot put your property into service and then sell it on the same year. You also cannot include land as something to depreciate. Therefore, you cannot deduct land costs like landscaping, planting, and clearing.
Moreover, you can deduct for depreciation up to the period that the entire cost of your property has been deducted and up to the time your assets have retired from service. It means that your property is converted to personal use, destroyed, exchanged, sold, or abandoned.
You may also make deduction claims during the period when your property is not in use, for example, a tenant leaves for a certain time before a new tenant occupies it. Just make sure that you make at least one repair to the space in preparation for the new occupants.
Can You Claim Depreciation on Renovations?
It is possible to claim depreciation on renovations on your investment property. For this, it is essential to ask a quantity surveyor to inspect your property and make the necessary adjustments on your depreciation schedule. Also, make sure to keep all records of your renovated costs.
If you bought your property after 2017, the secondhand dishwasher or oven does not qualify for deduction. All items should be brand new. The same consideration is applicable if the property you bought has been renovated by the previous owner and had resided in it for 6 to 12 months prior to the sale. In such a case, no appliances will be included in the deduction because they are considered previously used.
If you want to claim tax depreciation on a renovated property, no one should have lived in it at the time of renovation, and the renovation works should be substantial and not cosmetic. The property was also renovated for the purpose of selling.
On the other hand, if you purchased the property before 2017, you may claim depreciation for the plant and equipment items that are part of it. An experienced quantity surveyor can help decide on each item on the property such as plumbing, roofing, and so on.
Can You Claim Depreciation on an Old Property?
Basically, your depreciation claim depends on the age of the property and the date of your purchase. If the property is built after 1985, you may be able to claim for both capital works allowance and plant and equipment. But make sure you bought the plant and equipment.
If the property was built before 1985, you will only be able to claim for tax depreciation on the plant and equipment items you have purchased for the property. You can assess and apply to the depreciation schedule some capital improvements. They depreciate in the same manner to the structure and has a life expectancy of 40 years.
How Much Does a Depreciation Schedule Cost?
The cost for depreciation schedule varies, as there are many different factors involved. The main factors to consider is the location of the property, the size, and the type of investment property.
Your tax depreciation usually starts with the basic information necessary for preparing the schedule. This includes property address, property manager, purchase information, and other simple details. An inspection of the property is also conducted. The original cost of construction and any renovation costs on the property will be estimated.
The qualified inspector will photograph, measure, count, etc., all depreciable assets, including tapware, light fittings, and flooring. They will record all items that you can depreciate within the property.
Ultimately, claiming tax depreciation can make a huge difference to your cash flow. A depreciation schedule covers all deductions over the lifetime of a property; thus, maximizing your cash flow as an investor.