Australians looking to invest often consider buying an investment property, but few are aware of all the taxation benefits an investment property can generate.
Property investors are entitled to claim a tax deduction on their property for all the standard losses including interest, insurance, real estate management fees, rates, repairs and maintenance. One of the most beneficial but often missed deductions is property depreciation. The most common reason it is missed is because property investors do not have to spend money to claim it.
Depreciation is the reduction in value due to wear and tear on buildings and assets over time. When a property is used to generate income, the Australian Taxation Office (ATO) allows the owner to claim this reduction in value as a tax deduction.
According to Bradley Beer, depreciation expert and Managing Director of BMT Tax Depreciation, claiming depreciation is the key to increasing cash flow on an investment property.
“Research shows that 80% of property investors are failing to take advantage of property depreciation and are missing out on thousands of dollars in their pockets,” said Bradley.
Property investors also often make the assumption their property must be new in order to claim depreciation deductions. However both new and old properties have the potential to attract substantial depreciation benefits. This is because deductions relate not just to the building’s structure, but also the fixtures and fittings within. Property investors are able to claim a depreciation deduction on items such as carpets, stoves, blinds, hot water systems, light shades and heaters within their investment property, regardless of age.
For investors in some states who own apartments or units, common property in a development or complex can sometimes also be claimed as a depreciation deduction. Common property includes items such as driveways, pool pumps, outdoor furniture, lifts and common fire stairways. Claiming depreciation entitlements on common property can return thousands of dollars in savings to a property investor each year, depending on the apartment complex or development.
Quantity Surveyors can use depreciation methods such as immediate write-off, low-value pooling, and scrapping to allow investors to claim depreciation at a higher rate to maximise the deductions available.
Immediate write-off can be applied to any item within a property which costs less than $300.
Low-value pooling can be applied to two different categories of items; low-cost assets and low-value assets. A low-cost asset is a depreciable asset that has an opening value of less than $1,000 in the year of acquisition. A low-value asset is a depreciable asset that has a written-down value of less than $1,000. That is, the value of the asset is greater than $1,000 in the year of acquisition. Property investors who place assets in the low-value pool are able to claim them at a rate of 18.75% in the year of purchase, and at a rate of 37.5% from the second year onwards. This rule allows for an increased depreciation deduction on qualifying assets.
Scrapping allows an owner to write-off assets that are removed from a property and disposed. The owner is then able to claim the left over value as a 100% deduction in the year of removal, providing them with significant returns on their tax refund.
BMT Tax Depreciation is a quantity surveying firm who specialise in these methods of depreciation. BMT complete tax depreciation schedules for over 10,000 Accountant referrals each year, with reports showing an average of $5,000 to $10,000 as a first full year deduction for residential properties.
Investors are recommended to consult a specialist Quantity Surveyor to help prepare a depreciation schedule on investment properties. Quantity Surveyors are one of the few professionals qualified under the tax ruling 97/25 to calculate construction costs and determining what to claim to ensure depreciation deductions are maximised.
Article Provided by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is a Managing Director of BMT Tax Depreciation.
Please contact 1300 728 726.