The end of financial year (EOFY) is less than two months away so it’s a good time to focus on some tax tips for our property investors. If you missed it last year, we published a very helpful resource titled ‘Ten Tax Tips for Property Investors’ which is available on our website and provides a good overview for all property investors. We strongly recommend you take the time to read it.
In this resource, I would like to focus on investment property depreciation because it is an important topic, especially for investors who buy or build brand new homes. Unfortunately, too few investors are using investment property depreciation to its full advantage so I thought I would take this opportunity to outline a few tips which all investors should be aware of before the 30th of June arrives.
1. Understand what investment property depreciation is.
As investment properties get older and the items within them suffer wear and tear, they decline in value. The Australian Taxation Office (ATO) recognises this and allows investors to claim this loss of value as a tax deduction against their assessable income. This is called investment property depreciation. Just as you would deduct your interest payments and the costs of maintaining an investment property, you are allowed to deduct the depreciating value of the property itself and the items within it. Investment property depreciation is known as a ‘non cash deduction’ because it doesn’t require any ongoing payments such as interest. The deductions are built in with your investment property – so if you don’t claim investment property depreciation in your tax return, you are missing out on a genuine entitlement. It’s your job to claim it and the ATO does not issue reminders. There is a lot to consider when it comes to investment property depreciation and it can be a very complex topic to understand so if you would like to learn more, you can read an in-depth resource available on our website titled ‘Claiming Depreciation on Investment Property: the Property Investor’s Complicated Friend’.
2. Know the difference between the two different types of investment property depreciation.
An investor is effectively able to claim two different types of investment property depreciation. The first is ‘capital works’ which is a deduction based on the historical construction costs of the property and includes the building’s structure (which may also include the engineering, surveying, design and building fees) along with fixed assets such as built-in cupboards. Essentially, this is anything that is a permanent fixture or cannot be removed easily from the property. The second type is commonly referred to as ‘plant and equipment’ and loosely includes any items that can be picked up or easily removed from an investment property such as curtains, floor coverings, appliances or the hot water system. The distinction can sometimes be difficult and many items we consider to be one type (such as air conditioning) can actually be made up of components which fall into both categories.
3. Realise the investment property depreciation benefits of buying or building new versus established.
For any properties built after 1985, investors can effectively claim investment property depreciation (usually at a rate of about 2.5% per annum) for up to 40 years. This means if you buy or build a brand new investment property, you are able to claim investment property depreciation for the full 40 years which means you can claim maximum tax deductions against your assessable income. Most investors don’t realise that the tax benefits obtained through investment property depreciation can be equivalent to as much as 60% of the total purchase price of the property which can literally equate to hundreds of thousands of dollars! However, if you purchase a property than is 10 or 15 years old, you are only able to claim investment property depreciation for 30 or 25 years which in an immediate disadvantage. For this reason it pays for investors to buy or build a brand new investment property.
4. Recognise you need to spend money to save money.
If you want to claim depreciation against your investment property, you will need to engage the services of a tax depreciation company who will undertake an inspection of your investment property and provide you with an ATO-compliant tax depreciation schedule to give to your accountant. It is important to make sure the company or consultant you engage is a member of the Australian Institute of Quantity Surveyors (AIQS). You only need to have this schedule prepared once and it will outline all the benefits you can claim. The cost of this schedule will vary but will typically cost in the order of $600. The cost is also tax deductible and although some investors balk at the fee, it is a drop in the ocean when you consider spending a few hundred dollars on an investment property depreciation schedule now could possibly save you hundreds of thousands of dollars over the next 40 years (depending how long you hold onto the property for).
5. Remember it’s never too late to claim your full investment property depreciation benefits!
It is estimated only one in five property investors claim the full depreciation entitlements available to them but it is important to remember it is never too late! Even if you have owned and rented your investment property for a number of years, you can have a depreciation schedule prepared at any time and if you supply it to your accountant, they will be able to file an adjusted tax return for you to enable you to obtain any unclaimed investment property depreciation benefits.
So, with EOFY just around the corner, now is the time to follow up your investment property depreciation benefits with your accountant. If you have not claimed them, engage the services of a reputable professional as soon as possible to have your schedule prepared. Or, if you are already claiming depreciation against your investment property, conduct a quick audit with your accountant to make sure you are claiming all possible deductions for both ‘capital works’ plus ‘plant and equipment’. The more money you save, the faster you will be able to re-invest to expand your portfolio!
The best property investment advise you will receive from us is that we do not give financial advice. However we do recommend all property investors find themselves an experienced accountant who understands tax, investment property and the depreciation benefits you are entitled to. The can give you all the advice you need – not just at the beginning of the financial year but right throughout the year.
If you find yourself in a stronger financial position at the end of financial year, you might consider investing your tax rturn and expand your property portfolio. An Investor Assist Property Investment Specialist is available to assist you with this process. Just contact us here for further information. We know it’s a busy time of year for everyone but we are always only too happy to help!