Did you know that every year people just like you lose money, by not understanding their rental property depreciation entitlements? People short change themselves by not using these rental property tax deductions effectively.
Well this article may help you avoid this, and assist you in getting the most out of your tax return. So first of all what is depreciation?
Depreciation is basically the decline in the value of an asset that you can claim as a tax deduction against your income.
To give what could be a more familiar example, after you purchase a car it loses value over time due to various factors including wear and tear. This loss of value is called depreciation.
Similarly, your rental property (being the building not the land) starts losing value from the time you purchase it, again due to various factors including wear and tear and the limited life of various fittings and appliances (eg. Hot water systems and ovens). This rental property depreciation is claimable as a tax deduction against your income.
Assets that can be depreciated
There are 2 categories of items that can be depreciated – Building and Plant. They are depreciated in different ways.
These are generally the permanent structures such as brickwork, concrete, roofing, tiles etc. These rental property tax deductions may also be referred to as the capital works allowance. The cost of the building can be depreciated over 25 to 40 years depending on the time of construction.
As an example if your building cost $400,000 and you were eligible to depreciate it over 40 years, you would be able to claim a tax deduction of $10,000 per year ($400,000 / 40 years).
Houses built prior to July 1985, are generally not eligible for depreciation, other than any improvements made subsequent to that date.
We don’t mean your garden plants. No Plant refers to plant and equipment for your rental property, such as, curtains and dishwashers (assets that are not a permanent part of the building structure and can be easily removed).
The depreciation period for plant items varies on the type of plant it is, but is generally intended to reflect the normal useful life of the item and will be a much shorter period than for the building (which should have a longer useful life). The relevant depreciation rates are determined by the Tax Commissioner and published on the ATO’s website.
New versus Old
If you are looking at purchasing an investment property, it is a good idea to have an understanding of the difference in rental property tax deductions that will be available to you. There are substantial tax differences between buying a new rental property in comparison to buying an old one.
Let’s use an example to illustrate. Mary and John have both just bought themselves rental properties. John has bought an old Queenslander filled with charm and character, while Mary has gone with a brand new, modern apartment.
In Mary’s case, her new sleek modern apartment is built after 1985 and all the appliances (plant) are brand new. This means, Mary can claim rental property depreciation on the building and she will also be able to claim depreciation on the brand new “plant and equipment” in the property.
With John, his house was built prior to July 1985. This means he generally cannot claim depreciation for the building costs. On the upside though, the house had a brand new kitchen installed. Although most of the building is old and can no longer be depreciated, the cost of the new kitchen is eligible for rental property depreciation. He can also claim depreciation on the various plant items in the house, but needs to keep in mind the value of these items may be quite low due to their age and therefore the depreciation benefit will be reduced.
Calculating Rental Property Depreciation
The rules for determining your rental property depreciation benefits are complicated. My recommendation is to employ the services of a licenced quantity surveyor.
A licenced quantity surveyor will draw up a depreciation schedule for your property which you can then use in your annual tax return each year. In doing this, they will
- physically inspect your rental property and determine all eligible items for depreciation (ensuring you maximise your tax deductions);
- determine what parts of your rental property are “building” and “plant”;
- determine the historical cost of your building and plant;
- apply the correct depreciation rates to each item; and
- determine a depreciation schedule which will include the exact tax deduction you can claim for every year you own the property.
As an added benefit,
- Quantity Surveyors are recognised by the Australian Taxation office (ATO) as appropriately qualified to determine the construction cost and depreciation of a building and its fixtures; and
- The cost of employing a quantity surveyor is immediately tax deductible
Craig Joslin is the founder and CEO of The Australian Expat Investor (www.austexpatinvestor.com), a company dedicated to empowering Australian Expats with the knowledge and tools to develop clear and effective investment strategies to maximise their wealth while living abroad. Get Craig’s free ebook “Financial Survival Tips For The Australian Expat” at www.austexpatinvestor.com/free-ebook
Disclaimer : The information contained in this article is intended only as general commentary and does not purport to be comprehensive. No warranty is provided as to the accuracy. It should not be regarded as tax, financial, or legal advice. Remember, the value of an investment can go down as well as up, and you should seek professional advice that considers your specific pers