The property investor’s quick guide to depreciation
This might seem like an unseasonably early post, given that the end of financial year isn’t exactly looming around the corner.
But the years just seem to be ticking by quicker and before you know it, June 30 will be upon us. Or is it just me who feels that way?
Tax time can be highly beneficial for property investors, with the opportunity to claw back some of that much needed capital from the taxman, and cement the firm foundations on which your portfolio is built.
One surefire way to boost your cashflow at tax time is through a comprehensive depreciation schedule. So let’s walk through some of the main considerations for claiming depreciation.
- Do it sooner rather than later
Some people think they won’t need a depreciation schedule upon first purchasing a new investment property.
But tax legislation allows you to write off 100% of the value of a depreciable asset that’s worth $300 or less, in the initial year of acquisition.
In other words, even if there’s only one day of claim in that financial year, you still get the full value.
That $300 write-off might seem like chump change, but consider how it could add up across a number of low value items within your property, such as ceiling fans, smoke alarms, bathroom accessories and the like.
Then there’s the additional low value and low cost pooling legislation, which provides for an 18.75% deduction in the year of acquisition. All of this can add up, and mean a potential claim for the investor worth thousands of dollars in that first year of ownership.
- Even if it’s old, it could hold hidden depreciation gems
Many investors think that a property constructed more than thirty or forty years ago doesn’t warrant a depreciation schedule, but this is not the case.
Even a 1960’s Californian Bungalow can attract some significant depreciation deductions. How many of these properties still retain their original bathrooms and kitchens for a start?
Whether you’ve made the improvements yourself, or the renovations were the work of a former owner, there will be something to claim, be it new tiles in the bathroom, or updated light fittings in the modernized kitchen.
- You might be entitled to a retrospective claim.
Often property investors are of the opinion that if you fail to make a claim relating directly to that financial year, you’ve missed the depreciation boat.
Not too long ago, investors had the opportunity to access up to four financial years worth of back claims. The bad news is that’s been reduced back to just two years.
Although that’s still pretty good in the big scheme of things, because two years worth of deductions can certainly add up to a nice, tidy sum.
Get a schedule done as soon as possible, which will be dated from the time of settlement and show any past claims you might be entitled to receive.
If you think it’s going to be worth the effort, you might even consider requesting a ruling from the ATO that allows you to amend several years worth of claims.
- Itemise all repairs and maintenance expenses.
Doing so will ensure you’re maximising those deductions, which can make a substantial difference to your cashflow position.
An effective way to manage depreciable item costs, so that your accountant can make the most of your tax return, is to record all outgoings clearly on a spreadsheet.
Whether it’s a new hot water service, or a replacement light globe, list it down. A good tax agent will know exactly what to do with the information you provide, and what (if any) claim might be applicable.
Remember, not all items are depreciated at the same rate and for the same time. Fixing a hot water service, or giving the lounge a fresh lick of paint for instance, is more likely to be classified as repairs and maintenance and attract a 100% deduction at the time of claiming.
Whereas a new driveway would be considered capital works, meaning it depreciates at a rate of 2.5% over forty years. You can see why this distinction is important…who wants to wait forty years to claim back costs that you’re entitled to immediately?
Which brings me to my last important point…
- Not all depreciation schedules (and Quantity Surveyors) are created equally.
To avoid hassles with the tax office, it’s essential that property investors engage a suitably qualified and experienced Quantity Surveyor to draw up a comprehensive depreciation schedule.
As with all things real estate related though, not all Quantity Surveyors and the reports they produce hold the same value, and an inferior product can certainly cost you a lot of money!
Make sure your QS conducts a thorough inspection of your investment property, preferably while you are present and able to assist by answering any questions they might have about depreciable assets.
A QS worth his or her salt will have the knowledge and trained eye to recognise claimable improvements that even the local council were unaware of.
They will also take their time reviewing your costings to make sure no stone is left unturned and no claim goes wanting.
At the very least, you need to ensure the person you engage is a registered tax agent under the tax practitioner’s board and member of the Australian Institute of Quantity Surveyors, which oversees the industry.
These are mandatory requirements, and should you be audited and have any depreciation or other deductions scrutinized, will stand you in good stead. If they do not meet these standards, the ATO might very well reject the QS report.
Beware the QS firm that claims to be ‘endorsed’ by the ATO, as this is misleading marketing intended to reel you in and in no way true, given the ATO are not in the practice of endorsing any person or product.
A good QS will happily put their name to your depreciation report too, signing off on this important document to indicate they stand firmly behind the schedule produced on your behalf.
While you might not want the added expense of a QS fee, keep in mind that this (deductible) cost could actually see you net a nice little return on your investment capital at tax time.
I’m sure when you see the depreciation benefits start to roll in, you’ll think it was a very worthwhile investment indeed.
If you would like more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment strategies and structures, contact us or subscribe to receive regular post updates and industry insights.
Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: firstname.lastname@example.org
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