Investors who own rental properties are aware of the tax deductions they can claim, such as interest, property management fees, and maintenance costs. However, one deduction that many may overlook is depreciation. Even though interest rates are currently low, the tax deduction related to depreciation could still be one of the largest claimable deductions for some investors.
Depreciation is a term used to describe the loss of value that occurs over time with assets. Just like a car, certain components in a rental property will wear out over time and need to be replaced. This includes plant and equipment, such as light fittings, air-conditioners, and carpets.
It's essential not to ignore depreciation because it puts money back into your pocket. You can claim tax on the depreciation value, which can be used to reduce your tax payable. This is particularly useful for investors with negatively-geared properties as it can help to reduce the loss.
Depreciation is also an important factor to consider when purchasing an investment property. Seasoned investors factor in depreciation when creating their investment strategies, potentially making a new property more affordable.
The process of calculating depreciation is divided into two types: capital works deductions and depreciating assets. Capital works deductions refer to the construction costs of the building itself, such as brickwork and concrete. The Australian Taxation Office (ATO) determines that a building lasts for 40 years before it needs replacement, so depreciation is calculated over this period.
Depreciating assets, on the other hand, have a limited effective life, such as carpets, air conditioners, ovens, and microwaves. The ATO provides a list of all items that landlords can claim and the length of time each item lasts before it needs replacing (known as the "effective life").
For example, the effective life of carpet is around ten years, while a kitchen stove has a life of approximately 12 years. It's essential to keep track of the assets in the property, their effective lives, and the value of their depreciation, as it can significantly impact your tax deductions.
To work out how much you can claim, you can hire a qualified quantity surveyor to inspect your property and prepare a Tax Depreciation Schedule for your accountant to include in your tax return. The cost of the surveyor is tax-deductible and is usually a one-off cost. The benefits you receive from the depreciation tax deductions usually outweigh the cost of the surveyor.
If you make improvements to your property, you may need to update your depreciation schedule. Repairs may be claimed in full in the same financial year they are completed, but major renovations are considered capital works and affect the claim. If you purchase new equipment, such as an air conditioning unit, you may need to update your depreciation schedule.
The amount of tax savings from depreciation tax deductions varies depending on the property, but some investors have been able to claim back tens of thousands of dollars. To find out more about depreciation tax deductions, you can visit the ATO website or talk to your accountant. If you need help with property management, you can contact Century 21 on 07 5479 0868 or send an email to rentmyproperty@century21.com.au