Five Facts You Must Know About Property Depreciation Allowances
1. Property Depreciation is one of your greatest tax deductions for your investment home.
Since the introduction of negative gearing, taxpayers can offset rental income and claim expenses associated with their investment properties. As an investor, you can claim depreciation for the ageing and wear and tear of your building and assets during its effective life. The building’s depreciation value is calculated and itemised in a depreciation schedule. Same with the values attributed to the property's assets. These allowances are split into two types: Division 43 for Building costs, and Division 40 for Plant & Equipment assets.
2. You can claim more for depreciation on newly constructed properties.
The amount you can claim as a deduction will vary each year, depending on the age and condition of your investment property. You can expect to claim the maximum amount of deductions for newly built properties or those purchased directly from a developer. The Australian Tax Office (ATO) has determined the expected life of a building is approximately 40 years. This means each year, during the next 40 years, you can claim an annual deduction for deprecation provided the property is still held as an investment.
If you’re buying an apartment in a new residential complex with tenant facilities, you can claim a share of these assets too. Typically, these include items such as equipment for pool, tennis courts, sauna, gym, outdoor theatre, entertainment areas, heating, ventilation, fire prevention, alarms, and security systems, plus storage and lift facilities.
3. Your renovated and second-hand residential properties can still offer substantial depreciation rewards.
Many investors buy older homes or apartments and renovate to improve the value of their investment and attract higher rents. Costs associated with capital works or renovations to an existing investment property can be claimed as depreciation. It’s important to demonstrate your intention to use the property as an investment. This means you need to have proof that your house or apartment is available for rent such as lease listings with real estate agents. Sometimes, homeowners renovate their principal place of residence while still living in it, and later make the property available for rent. Unfortunately, in these cases, you cannot claim depreciation for the renovations.
Since legislative changes came into effect in May 2017, anyone purchasing older properties as an investment can only claim depreciation for the building or for capital works and major renovations (Division 43). Typically, these include works such as a new roof, home extensions, and installation of new facilities like a pool or granny flat. Any new purchases of Plant & Equipment items can be attributed values and listed as eligible deductions in your depreciation schedules. Eligible Division 40 assets are air conditioners, kitchen appliances, and other white goods, carpet, blinds, furniture and equipment, heating, fire, alarms, and security systems.
4. You can claim depreciation on holiday homes.
The same depreciation rules apply for holiday homes, provided you can prove these are available for rent consistently. The ATO is clamping down on depreciation claims on properties used as short-term holiday accommodation. They are checking online advertising platforms to see if your property is listed as available for leasing throughout most of the year.
In most cases, holiday homes are provided to tenants fully furnished. You can request furnishings to be included in your depreciation schedule to gain the maximum value in deductions. These may include everything from bed linen to refrigerators. While these assets won’t have a long effective life the accumulated depreciation value of all the items will enable you to offset rental income during the financial year.
5. You could lose money when you use inexperienced and unregistered Tax Agents.
Compiling an accurate and comprehensive depreciation schedule requires knowledge of construction and tax legislation. Some providers lack this insight and incorrectly calculate values or miss listing deductions altogether. Others are not registered Tax Agents, and thereby not legally allowed to prepare these documents.
As a company of accredited Quantity Surveyors and Registered Tax Agents, we have been providing property tax depreciation schedules for investors since 1985. Each report is thoroughly checked to ensure it meets our high quality standards, as well as the ATO’s requirements. It’s well worth the one-off cost to obtain a thorough and compliant depreciation schedule that you can use each year for the life of your investment property.
To claim thousands of dollars in tax deductions for your investment property, order your depreciation report online here.