When looking to purchase an investment property, it is worthwhile to ask a number of questions. While many investors consider location, purchase price and tenanting ability when contemplating an investment property purchase, depreciation is often overlooked as an important factor. Depreciation can help unlock the cash flow potential within an investment property, often resulting in thousands of additional dollars for the investor each financial year.
When purchasing an investment property, depreciation is often overlooked.
Depreciation can be claimed by any property owner who obtains income from their property.
What is depreciation?
As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a deduction. Depreciation can be claimed by any property owner who obtains income from their property.
Claiming building structure as a deduction
Capital works allowance deductions are based on the historical cost of the building excluding the cost of all ‘plant’ and non-eligible items. As a general rule any residential building which commenced construction after the 15th September 1987 and any commercial property which commenced construction after 20th July 1982 are eligible for the capital works allowance.
Common depreciable items in an investment property
Plant and equipment items, commonly known as removable assets, are also eligible for depreciation deductions*. Each plant and equipment item has an effective life set by the Australian Taxation Office. The depreciation deduction available on each item is calculated using the effective life. Some plant and equipment depreciable items commonly found within a property include:
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Hot water systems
Blinds and curtains
Claiming depreciation during renovation
To ensure property owners are making the most of the tax deductions available, they should consider a pre-renovation depreciation report. Old assets within a property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are replaced during a renovation, the owners may be entitled to claim them as a tax deduction. A Quantity Surveyor, who is qualified to calculate values and construction costs, can ensure the owners are not throwing dollars away.
Investment property owners who are aware of potential deductions are able to maximise cash flow through their investment properties.
Article provided by BMT Tax Depreciation. Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
*Under new legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. To learn more visit www.bmtqs.com.au/budget-2017 or read BMT’s comprehensive White Paper document at www.bmtqs.com.au/2017-budget-whitepaper.