What’s the most exciting thing about a depreciation schedule?

Hint, it comes at tax time…

Not sure what depreciation is, how it works, or how you can make the most of it when it comes to investing in property? Then keep reading to learn more!

What is depreciation?

As items age, wear and tear occurs and their value decreases. This is called depreciation. So far, so good.

So, when it comes to your investment property, these “items” can be classified as either “plant and equipment” assets, also known as the fixtures and fittings; or “capital works”, the actual building itself.

Building depreciation is typically done over a forty year period and includes the floor, walls, roof and anything “structural”. Anything “stuck to the building” – such as carpets, air conditioners, kitchens, bathrooms and even electrical wiring and light switches – is deemed to have a much shorter lifespan. We break this down for you later.

As an investor, you can claim depreciation on these items – and many more – as a tax deduction, which can lead to an increase in your tax refund. Sound more interesting now?

That’s why maximising your depreciation deductions is key, otherwise you’re potentially leaving money on the table for the Australian Tax Office (ATO) to pick up…and nobody likes doing that, especially savvy property investors!

“One of the main reasons investors pursue a new or off-the-plan property strategy are the significant tax benefits.
You’re gaining all the tax depreciation benefits, while benefitting from low repairs and maintenance requirements, and they rent well!”

Luke Harris, CEO of The Property Mentors

In what scenarios can investors claim property depreciation?

  • Brand new residential investment properties
  • Second-hand investment properties that have been renovated
  • Buildings that still qualify for building depreciation
  • Investors purchasing property in managed funds
  • Corporate entities that buy properties
  • Owners who switched from a Principal Place of Residence to rental properties before 1 July 2017
  • Commercial property (for example, manufacturing or motels)

But it’s always worth asking the question! Tuan Duong, the founder of Duo Tax Quantity Surveyors, elaborates:

“If you currently own a rental property, or if you're buying a property – whether it's brand new or not – it's as simple as asking the question. All we need is the property address, then using real estate data we look at photos and conduct a pre-assessment at no charge. If we can guarantee that there will be at least $2,000 to $3,000 worth of deductions then we can go on to inspect the property, assign a value to each asset and create a tax depreciation schedule for you.”

What is a tax depreciation schedule?

A tax depreciation schedule is a comprehensive report detailing the deductions you can claim on your investment property. It involves identifying its value, estimated construction costs, and fittings and fixtures. If it has been prepared by a professional quantity surveying team you can be sure that you’re getting all the tax benefits to which you’re entitled.

What can you claim?

A tax depreciation schedule should be an ATO compliant document detailing:

  • Plant and equipment assets
  • Capital works

Capital works

Also known as Division 43 (an ATO Term), or a capital works allowance, or a building write-off, capital works refers to the items that make up the building and those that are fixed to the building (that is, objects that aren't removable). For example:

  • Concrete slab
  • Timber framing
  • Retaining walls
  • Fences
  • Built in wardrobes
  • Toilets and vanities
  • Basins and sinks

These items generally have an effective life of forty years, and so you are able to claim the decrease in value as a deduction over the 40 years – provided that you’re generating an income from the property.

Plant and equipment assets

Also known as Division 40, plant and equipment items are the fixtures and fittings and other removable assets found within an investment property. They are easily detachable and generally include items that are motorised, for example:

  • Air-conditioning units
  • Lights
  • Blinds
  • Ceiling fans
  • Oven
  • Rangehood
  • Smoke alarms

These items have a shorter expected life span than the forty years allocated to capital works items, and their depreciation is outlined in the ATO’s Asset Effective Life Schedule (there are also different rates of depreciation between commercial and residential properties). The ATO recognises over 6,000 different assets and their schedule provides guidance on how long an asset is effective before it’s worn out. For example, light fittings have an effective life of ten years. But there are some exceptions; Tuan elaborates for us:

“The ATO also applies common sense around very low value items, say worth less than $300, where they will allow you to claim 100% depreciation in the first year of ownership, giving you the advantage of claiming an immediate write off for that particular asset.”

Tuan Duong, founder of Duo Tax Quantity Surveyors

It pays to seek professional advice

At the end of the day, it pays to seek out depreciation advice from a dedicated quantity surveyor, because it's not as simple as it seems on the surface. With legislation dictating what you can and can’t claim, it's something that you don't want to take a risk on, neither do you want to miss out on all available deductions!

If you’d like easy, ongoing access to our team of independent accountants, quantity surveyors, mortgage brokers, financial planners, solicitors, financial advisors, and more, start by booking in a free discovery call with one of our property mentors today! We bring together a wealth of knowledge and experience to deliver successful results seamlessly to our members, providing you with results-driven professional advice, right now.

Like to learn more?

Check out our Investor Intelligence podcast:

Why a depreciation schedule is important for investment performance

This week's episode is jam-packed full of helpful information about a topic that can work very successfully with property investment - depreciation. Tuan Duong, the founder of Duo Tax Quantity Surveyors, is here to guide us through what it is, how it works and how you can make the most of it.

Click here to listen now.

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