Property tax deductions acknowledge that the building and its plants and equipment will eventually need to be replaced. Plants and equipment refer to items within the building, such as blinds.
It doesn’t matter that these items were paid for by another party, such as a developer or previous owner, as you, the current owner, can continue to claim deductions as these items continue to depreciate in value.
As with any other tax deductions you can claim, depreciation will reduce your taxable income. You can claim $10,000 deductions if your income was $100,000 for the year. Tax will be paid only on $90,000.
While claiming depreciation deductions on your investment property can save you thousands in tax dollars, “Depreciation should not be your initial focus when purchasing an investment property,” said Tyron Hyde, chief executive of Washington Brown, one of Australia’s oldest and most respected quantity surveying organisations.
“You should, of course, first consider things such as new infrastructure being built around the area, the rentability of the property, rental yield, and most importantly, buying the property at the right price.”
Whether through bad advice or insufficient knowledge, many investors don’t claim depreciation and are paying more tax than necessary.
These myths and truths are listed below.
Myth #1 – It’s impossible to depreciate on your own.
Many property investors believe depreciating your own property can save you money. This may appear to save money but it could lead to missed deductions. These missed deductions could add up to thousands of Dollars over the lifetime of your property.
According to the Australian Taxation Office (ATO), licensed quantity surveyors should only be used to estimate depreciation and original construction costs when these figures are not known. The Australian Institute of Quantity Surveyors’ (AIQS) Code of Practice also says that the site inspections are necessary to satisfy ATO requirements.
In addition to ensuring that you don’t miss out on any eligible deductions, a comprehensive tax depreciation schedule prepared by an accredited firm can protect you in an event of an audit.
Myth #2 – Depreciation is only for new properties
All investment properties, whether new or old, are eligible for depreciation. Even properties that were built prior to 1985 when the Building Allowance was introduced can be depreciated.
The common misconception that older buildings aren’t eligible for depreciation centres on the fact that you cannot claim the building allowance component of depreciation on residential properties built before the 18th of July, 1985. This is false. It is simply false.
In older properties that were built before this date, plant and equipment may still be claimed.
Myth #3 – All depreciation reporting look the same.
An accurate tax depreciation schedule is a great way to improve the cash flow of a property. It is prepared by a reputable quantity surveying firm. Variations in methodology and age estimates between firms can make a significant difference in the deduction amount. In order to maximize deductions, you must include all depreciable items. The amount of time you spend reviewing the report will determine how thorough it is.
Myth #4: You can’t claim on works done by the previous owner.
All works, even those done by previous owners are subject to depreciation. Also, you can claim less obvious improvements such as plumbing or wiring.
While it is unlikely that a new owner would be able to access actual cost information regarding any works completed by the previous owner, the ATO states that a quantity surveyor is authorised to estimate the costs for any works on a property completed after July 1985 for residential properties, and July 1982 for commercial properties, where the actual costs aren’t known.