Getting started in the world of property investment can be exciting and daunting in equal measure. Investing in your first property, you need to ensure that you choose the right property, conduct market research, market your investment, and maintain your investment moving forward. With all of these costs and more to consider, you need to ensure that you take advantage of the tax depreciation deductions that you are entitled to.
Tax depreciation can be a difficult topic to understand, especially for first-time property investors. There are various rules and factors that must be considered when calculating the deductions that you can claim for in regards to your investment While you certainly do not need to be an expert in property depreciation, having a basic knowledge of what is involved will help you to maximise your claim. To ensure you claim the maximum deductions available to you, it’s wise to speak to a specialist in tax depreciation in Melbourne, to learn more about how you can significantly reduce your taxable income at the year’s end.
Continue reading to learn everything you need to know about tax depreciation in Australia and how you can ensure you claim all the deductions you are entitled to.
What Exactly Is Property Depreciation?
Over time, a property, and the items contained within, will experience general wear and tear. If you purchase a property for income-producing purposes, the Australian Taxation Office (ATO) states that you can claim deductions related to wear and tear on your building and plant and equipment assets. Property owners in a range of different building types including, but not limited to, commercial properties such as retail spaces, hotels, warehouses, offices, restaurants, among many others, as well as different types of residential rental properties, can claim for capital works deductions and depreciation for plant and equipment assets.
A Guide To The Different Types Of Deductions
Many property investors, and particularly first-timers, struggle to get to grips with property depreciation. One of the main things that confuse many investors is the difference between the two types of depreciation that are available. Below, we will take a look at the two primary types of deductions available so you can be sure that all of your items are properly categorised as the correct type of deduction and properly claimed for.
Capital Works Deductions (Division 43)
Capital works deductions are related to deductions that are available to cover aspects of the building’s structure. These deductions also relate to items considered permanently fixed to the property. For example, the windows, doors, kitchen fittings, bathroom fittings, tiles, foundations, walls, and floors would all be included in capital works deductions.
In commercial and other non-residential income-producing properties, capital works deductions may be claimed at a rate of either 2.5% or 4% of the property’s listed building cost. However, this will be dependent on the type of building it is and its age. Residential properties, on the other hand, allow for capital deductions to be claimed at 2.5% of the year, in a maximum period of forty years.
Plant And Equipment Deductions (Division 40)
Plant and equipment deductions may be claimed for any removable or mechanical fittings or fixtures in the property that can be removed. The perceived life of each individual item will be taken into account when determining whether or not items can be included in the relevant tax ruling. As an investor, you can claim tax deductions for up to six thousand different assets. Items such as ovens, air conditioners, refrigerators, freezers, dishwashers, hot water systems, smoke alarms, range hoods, blinds, carpets, curtains and exhaust fans are all included, along with many more commonly found items.
The Age Of A Property And Tax Deductions
How old a particular property is can often make property investors think twice about committing, worried that they may not be able to claim for depreciation. While newer properties typically do receive higher deductions, because of increased construction costs and the higher starting value of the new property and new fittings, older properties should not be discounted. Remember, just because a property was not built recently, does not mean that you cannot claim for depreciation.
Residential property investors can claim capital works deductions for their properties that began construction after September 15th 1987. If your investment property is older than that, it must be renovated for you to claim capital works deductions. However, even if the previous owner carried out renovations on the property, within the legislated time frame, you could still claim for capital works deductions on your property.
When it comes to plant and equipment deductions, the age of the property has no bearing on calculating the deductions. Depreciation for plant and equipment assets is dependent on the quality and condition of each individual item and is calculated on their perceived lifespan, beginning on the date of the settlement being finalised.
How To Maximise Your Property Depreciation Claim
To ensure that you maximise your property depreciation claim, you will need to speak with a qualified quantity surveyor that specialises in calculating building costs for depreciation purposes. Traditionally, a quantity surveyor is a construction cost consultant, which gives them the perfect skillset to calculate the costs of building your property.
Recognised under Tax Ruling 97/25 as a select profession that has the appropriate construction costing skills to calculate building costs for depreciation purposes, hiring a quantity surveyor is essential in maximising your property depreciation claim. With their construction expertise and knowledge of taxation legislation, they can perform a thorough inspection of your investment property to create a tax depreciation schedule, outlining the deductions that you can claim.
Taking this report to your accountant, you can ensure that your annual income tax return will be more favourable, allowing you to significantly lower your taxable income through your property depreciation claim.
Learn More About Property Tax Deductions To Lower Your Taxable Income
As a property investor, you need to ensure that you have enough cash flow available to manage your property effectively. Speaking to a property tax deduction specialist can help you to increase your available cash flow, allowing you access to more money to maintain and upkeep your investment properties. With an effective property tax depreciation schedule in place, you can significantly reduce your tax liability at the end of the year. Property investors can save hundreds, or even thousands of dollars each year by taking the time to understand property tax deductions. Whether this is your very first property investment, or you are a seasoned pro, it’s wise to speak to a property depreciation specialist to see how much money you could be saving each year.
With higher profits at the end of the year, you will have more funds available to make improvements to your investment property and grow your portfolio over time. As your property portfolio expands, you will be able to claim even more property tax deductions on each of the properties that you own. Choose the right properties to grow your portfolio, take advantage of the tax breaks available to you and you will be able to lower your taxable income at the end of the year, leaving you with more money to reinvest in your business or for you to enjoy in whatever way you see fit.
