Property depreciation is a somewhat complex topic even for the most experienced of investors. In reality, there are actually a number of taxation perks that investors stand to benefit from when it comes to property depreciation. Unfortunately, the complexities involved can often result in many failing to take full advantage of property depreciation perks.
In today’s article, we will have a look at a beginner’s guide to depreciation schedules which will help you navigate your way through some of the depreciation deductions that you may be entitled to, so read on to find out more
Property Depreciation 101
Before we start, it is important to fully grasp the meaning of property depreciation. According to depreciation schedule experts, as a property gets older, you’ll find that natural wear and tear occurs to your asset – in other words, the value of your property depreciates. Thankfully, with this in mind, the ATO allows owners of investment properties to claim depreciation as a tax deduction. When it comes to what you can claim, depreciations are split into two main categories:
1. Capital Work Allowance
Capital work allowance is a tax deduction that you can claim for expenses such as extensions to your existing property. Some of these additions include building a patio, pergola, garage or altering the building by knocking down or putting up new walls in order to fix any wear and tear that may have occurred throughout the asset’s lifetime. These also include structural improvements to the surrounding property.
Any residential building in which construction was commenced after the 17th of July 1985 will entitle an owner to capital works deductions. Capital work allowance can be claimed at a rate of 2.5% per annum for up to 40 years.
Expenses in the preliminary stages such as engineering fees, surveying fees, architect fees and costs of building permits also form part of construction expenditure. In an unfortunate instance where your rental property is damaged due to a natural disaster, you will be able to claim a deduction for the income year in which the property has been destroyed for all construction expenses that have yet to be deducted.
2. Plant and Equipment Depreciation
The second claim a property owner can make is for plant and equipment depreciation. These expenses can be claimed for any easily removable fittings and fixtures within the property. There are over 6,000 depreciable assets that are recognised by the ATO, some of which include items such as beds, blinds, hot water systems, smoke alarms and air conditioners. Do keep in mind that plant and equipment deductions are only available for assets in brand new properties. Additionally, only assets that cost under $1,000 can be placed into the pool.
Benefits of a Depreciation Schedule
Some of the benefits of a depreciation schedule include:
- Ensuring that your capital allowance claims + plant and equipment claims are claimed in accordance with ATO legislation.
- Time saved in trying to calculate deductions on your own.
- Ensuring that you maximise deductions in order to create the greatest cash flow for your investment property.
Preparing A Depreciation Schedule
Including a depreciation schedule with your tax return will deduct the depreciation from your pre-tax cash flow in order to maximise your overall return. Here is a guideline on how you can get started:
- Gather vital information such as the name you would like to appear on your depreciation schedule, property address, purchase information and the details of your property manager and accountant.
- Enlist the help of a registered quantity surveyor who will be able to get you the full tax benefits you’re legally entitled to.
- A depreciation schedule will be generated by your surveyor which provides a detailed description of your property and outlines the claimable deductions you’re entitled to over a 40 year period.
- Finally, use this report when preparing your annual tax return.
Enlisting the help of a registered quantity surveyor to assist you in preparing your depreciation schedule is certainly one of the best things any investor can do to fully maximise overall returns on an investment property. We hope that this article has given you some insight into some of the deductions that you are entitled to and subsequently how you can increase the cash flow of your investment property.
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