A large majority of property investors are not taking advantage of property depreciation and are subsequently missing out on increased cash flow.
The Australian Taxation Office (ATO) allows property investors to claim depreciation as a non-cash deduction. Of all the tax deductions available to property investors, depreciation is commonly missed by investors. This is because there is no requirement to spend money in order to make a claim, so the deduction is often not front of mind.
"As a building gets older, items wear out - they depreciate. Depreciation can be claimed by any property owner who obtains income from their property," said Bradley Beer, Chief Executive Officer of BMT Tax Depreciation.
"This deduction essentially reduces the investment property owner's taxable income - they pay less tax," said Mr Beer.
"Eighty per cent of property investors are failing to take full advantage of property depreciation and are therefore missing out on thousands of dollars in their pockets," said Mr Beer.
Investors should be aware that depreciation can be claimed on items such as carpets, stoves, blinds, hot water systems, light shades and heaters. These items are classified as plant and equipment assets and the depreciation will be calculated based on individual depreciation rates set for these items over an effective life. For example, carpet can be claimed at a rate of 20 per cent, where as a stove can be depreciated at 16 per cent.
There are also deductions available for the wear and tear on the structural elements of a building and the items found within it that are deemed irremovable. These deductions are otherwise known as capital works deductions and can be claimed at a rate of 2.5 per cent of the historical construction cost over forty years.
Not all properties qualify for this allowance, as a rule any residential property in which construction commenced prior to the 15th of September 1987 will not qualify. However, if structural renovations have been carried out within the legislated dates they can be claimed, even if they were completed by the previous owner.
New properties have newer fixtures and fittings, so the starting value of these plant and equipment items are likely to be higher, resulting in higher deductions for the owners of these properties.
Construction costs generally increase over time, making building write-off deductions on newer buildings higher as well. However, new and old properties both have the potential to attract depreciation benefits.
Property investors are able to claim missed deductions on previous tax returns. The ATO permits tax returns to be amended on the previous two financial years, allowing the property investor to reclaim missed deductions.
To maximise depreciation deductions, property investors should engage a specialised Quantity Surveyor to complete a tax depreciation schedule. Quantity Surveyors are recognised by the ATO as being appropriately qualified to estimate building costs for the purpose of depreciation.
A specialist Quantity Surveyor finds on average between $5,000 and $10,000 as a first full year depreciation deduction on a residential investment property.
The cost of obtaining a depreciation schedule is a once-off cost and lasts the life of the property. Obtaining a schedule will Assist Accountants in maximising depreciation deductions on a property investment when preparing an income tax return for the property owner.
Be a part of the 20 per cent of property investors who are experiencing increased cash flow by claiming property depreciation.
