Property Depreciation 101



Depreciation. It may sound like a negative term – but for anyone with investment properties and rental portfolios it can be an incredibly useful way to minimise your tax payment. It’s important to have a good understanding of depreciation and how it affects the overall value of your property – along with the projected income you can expect from it. Here we explain the basics of property depreciation, with insights to help you to determine whether you can benefit. We’ll also cover why it’s so important to know how your property will be assessed and examined from a tax perspective for depreciation purposes.

 

What is property depreciation?

To explain property depreciation in simple terms it’s useful to compare it with a car. A car used for business is assessed for wear and tear each year – and this calculation can then be claimed against the taxable income you gain from it. In the same way, wear and tear on a property can be claimed back against the taxable income you receive as a property investor. There are two types of property depreciation allowances:

 

  • Depreciation on Plant and Equipment – This covers items within the building, such as ovens, dishwashers, carpets, curtains and more.
  • Depreciation on Building Allowance – This covers the construction costs of the fabric of the building itself – such as concrete, brickwork, tiles and timber.

 

These costs can then be offset against your accessible income – and it’s as simple as having a qualified property surveyor take a look at your property and prepare a report for your accountant.

 

How can a depreciation schedule help?

A depreciation schedule refers to the amount of money you can claim back against your tax bill. This will help you to pay less tax. The schedule is prepared by a Quantity Surveyor, who will assess your property to determine the amount of wear and tear eligible for depreciation purposes that is present, then calculate the cost attached to it. This information is compiled in a report which is then passed to your accountant, who will submit it to the Australian Taxation Office (ATO). The process normally takes around two to three weeks.

 

Is there a deadline for claiming depreciation?

Not if your property is used for residential purposes – but it is advisable to arrange a depreciation schedule upon purchase of an investment property. This could guide your purchasing decisions to maximise the revenue you can expect to receive from each property. All properties built after 1985 are eligible for assessment of both types of depreciation. Properties built before 1985 can only be assessed for Plant and Equipment depreciation – which could still make a significant dent in the tax bill you’ll be liable to pay come year end.

 

Is this a job for my accountant?

Yes and no – your accountant will be involved, but only at the end of the process when they receive and incorporate the report into your tax schedule. If your property was built after 1985, ATO rules stipulate that only a quantity surveyor has the authority to produce a report estimating construction costs. As this is a highly technical discipline it’s important to have the schedule prepared by an experienced professional. Always check for accreditations and memberships of professional boards, such as the Australian Institute for Quantity Surveyors.

 

Is a property inspection required?

A site inspection carried out by a quantity surveyor will be necessary in order to satisfy ATO requirements. They will walk around your property and make a note of each depreciable item, taking photographs which will form documentation that serves as evidence in the event of an audit. Ideally the quantity surveyor should be able to come in and carry out their assessment just after purchase and before your tenants have moved in. This can be organised even when tenants are living in your property – as the surveyor will liaise with your Property Manager who will arrange a suitable time with your tenants.

 

Are renovated properties eligible?

You can still claim for depreciation on renovated properties – but the ATO will want to know how much you spent on renovations. This applies even if renovations were carried out by the previous owner – but where the cost isn’t known a quantity surveyor will need to provide an estimate.

 

How much does it cost to have a depreciation schedule drawn up?

The costs attached to depreciation schedules vary depending on the type of property, location and size. Other factors may also play a role in the overall cost – but if you stand to save a significant amount it’s well worth the initial outlay. Several leading firms of Quantity Surveyors offer a money back guarantee meaning you’ll have absolutely nothing to lose – but could stand to save a fortune on your tax bill. Quantity Surveyors fees are also 100% tax deductible.

 

How much can I save?

The savings involved in depreciation tax relief can be significant – but as each property is unique with differing factors at play it’s not possible to make a specific estimation. There are several calculators you can use online – but again these won’t necessarily offer an accurate view of the overall value of your property’s depreciation schedule. The best course of action is to contact a reputable firm of Quantity Surveyors – as they’ll be happy to come out and discuss your property with you and can give you a rough idea of the amount you can expect to save. Beware of companies offering a ‘property depreciation estimate’ for a fee – the best ones won’t charge.

 

Remember to take depreciation into account when purchasing.

The best thing to do is to consider depreciation when you are purchasing your property. This is the simplest way to incorporate savings into the overall cost of the purchase and investment. Speak to your property manager or advisor and enlist support from a Quantity Surveyor to help you to make savvy decisions when acquiring new property.

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