Investing in properties can be a lucrative venture, but it also comes with many legal responsibilities. Therefore, before you even purchase any property, it helps to understand what these are and how you can turn your investments into profit. As a rental property owner, Investment Property Depreciation will be one of the biggest things you should know.
Buying real estate for income-generating purposes comes with many tax advantages, but depreciation is often overlooked. Australian law comes with many stipulations that make property investments affordable, so understanding how depreciation works ensures that you make use of your tax allowances effectively.
What is Property Depreciation?
Similar to a car and other assets, properties decrease in value as they age. According to the Australian Taxation Office (ATO), you can claim this depreciation as a taxable deduction throughout the useful life of your property. In addition, it counts as a non-cash deduction, which means you do not need to bring out any money to make a claim and reduce your taxable income.
Property depreciation can fall under two categories:
- Division 43: Capital Works Allowance
This refers to tax deductions applied to your building’s structure and items or assets permanently fixed to your property. If you or the previous owner make improvements or renovations, these will also count. Take note that this division only applies to rental properties built after September 15, 1987.
- Division 40: Plant and Equipment Depreciation
You can claim this depreciation for the assets, fixtures, and fitting that can be easily removed from your property. Examples include air conditioners, smoke alarms, solar panels, and blinds.
When claiming your depreciation deduction, you can use two different methods:
- Prime Cost
This method splits the deduction equally throughout the property or asset’s useful life.
- Diminishing Value
This method grants you higher deductions at the start of your property or asset’s useful life, then gradually decreases later on.
Creating a Depreciation Schedule
As an investor, you must stay on top of your Investment Property Depreciation to maximise your claims and, subsequently, your profits and cash flow. The best way to keep track of this is through a tax depreciation schedule, which outlines all your depreciation deductions.
The report contains basic details about your property, such as the address, property manager, and purchase information. After this, your property will be inspected to determine all the depreciable assets that can be recorded. From here, your schedule will then be prepared. It will generally contain the following components:
- Glossary of terms for technical terminology used in the schedule
- Overview of deductions per method
- Prime cost and diminishing value method deductions
- Useful life and depreciation rate for division 40-applicable assets
- The 40-year projection for property, including all depreciable items
- Low-value and low-cost pooling
As you can see, the tax depreciation schedule contains a lot of technical information, so you often need to engage with different professionals to get it done. Generally, a quantity surveyor and accountant will prepare the schedule and submit it to the tax office.
Quantity surveyors are in charge of estimating construction costs and checking to see that you get all applicable deductions for your property. They help provide reliable figures to use for your schedule, so make sure you hire someone with the proper credentials and qualifications for the job. You will find various specialist firms offering such services, so do your research before deciding who to choose.