Many people overlook the tax deduction depreciation can afford them when calculating their net taxable income (or loss) from a rental property. Tax law allows property owners to claim a deduction for the decline in value of furniture, plant, equipment and buildings used in or as part of a rental property. Take the time to learn what can and cannot be depreciated and you will avoid paying too much tax!
Depreciation for furniture
This claim is the simplest to calculate, and the hardest to miss. If a property is furnished, the ATO will permit a landlord to claim the cost of the furnishings as a tax deduction over a number of years. This can be for furnishings included at time of purpose, or items bought during the rental period.
Typically an item of furniture can be claimed over 5-10 years, as stipulated by the tax office.
Depreciation for the building
Depreciation claims for plant, equipment and buildings are often overlooked. Generally, you will be permitted to claim a small percentage of the cost of the building and fixed structures on the property over time.
It is standard for the depreciation rate to be 2.5% from the time the property is built, and the total claim will be limited to the construction cost. You will need to have a quantity surveyor to do the figures for you.
For example if you bought a house today for $700,000 and that house cost $200,000 to build in 2000, then you could potentially claim an extra $5,000 against the rental income every year until 2040.
If the house were an off-the-plan, newly built apartment it is calculated differently again. For example, if it cost you $700,000 today with total building costs of $450,000 – then there are some big claims you could make of $11,250 per year.
The hidden catch of depreciation
When selling your property, your cost base is reduced by the building depreciation you have claimed, thus increasing your capital gain.
Despite this, for most investors it works out better to claim depreciation over the years and pay more in capital gains when selling than it does to never claim depreciation. Seek advice from your accountant when deciding if it will benefit you to claim depreciation in your personal situation.
A list of depreciation allowances an investor is entitled to claim is called a depreciation schedule. This will include a list of all depreciable items, and a schedule showing their decrease in value over time. It is standard for the depreciation schedule includes the capital works deductions, and the plant and equipment allowances.
A quantity surveyor can be employed to draw up a depreciation schedule for you, or you can choose to do this yourself if you’re an experienced investor. Employing someone whill generally set you back $400-$750 depending on how much work is involved and who you employ.
If you are purchasing a new investment property, you may have the option of negotiating a depreciation schedule from the developer free of charge, as they usually employ a quantity surveyor as part of their normal business operations.
Methods of depreciation
There are two methods accepted to calculate your depreciation claim.
- The Prime Cost Method is a fixed claim amount, calculated as a percentage of the item’s original value or cost. Therefore your claim is the same each year for the life of the item.
- The Diminishing Value Method is where the claim decreases by a particular percentage each year. This means you’re able to claim more in the first year, and less in later years. The reason for this is that items depreciate quickly when they are new, and this depreciation slows as they get older.
Speak to an accountant
Your accountant or quantity surveyor will be able to tell you which one of the two methods above is applicable for each claim on your investment property. We recommend obtaining personalised financial advice from a professional before making any investment or decision regarding their finances.
For more information on investment property tax deductions please click here or speak to us online now. Alternatively, call us on 1300 558 887.