Property Depreciation

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Many property investors are failing to take advantage of their properties depreciation and are potentially missing out on claiming thousands of dollars!

Depreciation As Tax Deduction

Any property that generates income for the owner is eligible for significant taxation deductions. Of all the tax deductions available to residential property investors and commercial property owners, property depreciation is most often overlooked because it is a non-cash deduction. A building and its fixtures depreciate whether the owner claims it or not.

As a property ages, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this wear and tear, depreciation, as a deduction. Check ATO website here for more information.

To claim these deductions, investors usually hire a specialist Quantity Surveyor to complete a Tax Depreciation Schedule.

Preparing a Tax Depreciation Schedule

A Tax Depreciation Schedule involves:

  • Full inspection of your property to identify all depreciable items
  • Historical construction cost estimate of the main building
  • Valuation of all plant and equipment items
  • Preparation of a report which is accepted by the ATO and summarises the depreciation allowances for the future years

For investors who had significant tax bill from the previous year, the results could be significant. Here is an example: An investor’s tax bill of $3,000 could become a tax credit of $12,000 thank to the Tax Depreciation Schedule.

It is often a surprise to property investors who own an old building to find that property depreciation will attract significant depreciation benefits for both new and old properties. Property owners who have not been claiming depreciation are able to go back and amend previous returns to claim missed deductions in previous financial years.

The following example shows how property depreciation will increase the cash return on an investment property.

An investor owns a property purchased for $420,000 with a rental income of $490 per week resulting in a total income of $25,480 per annum. Expenses for the property such as interest, rates and management fees totalled to $32,000. Therefore the total deductible loss was $6,520.

By claiming depreciation a specialist Quantity Surveyor was able to turn their negative cash flow position into a positive one, saving them $4,255 for the year.

The following scenario uses the above figures to show this investor’s cash flow with and without depreciation.

This investor used property depreciation to go from a negative cash flow position, paying out $79 per week, to positive cash flow, earning $3 per week on the property. Claiming property depreciation saved this investor $4,255 for the year.

Ensuring that each depreciation claim is maximised on any building requires a combination of construction costing skills and thorough knowledge of current tax depreciation legislation.

For this reason, it is recommended for investment property owners to consult a specialist Quantity Surveyor to prepare a Depreciation Schedule before lodging their tax return.