DISCLAIMER: We are not financial advisors and none of the following information is offered as financial advice. It is up to you to seek your own independent financial advice. We do recommend seeking the services of a qualified and experienced Tax Accountant. They should be an expert in dealing with property portfolios. Ideally your Taxation Accountant is a property investor themselves. The article that follows is a general overview of rental property depreciation. Specific details vary with each person's situation.
If you’re getting lost in the world of tax depreciation and how it relates to your rental property, you’re not alone. It’s a daunting and confusing area. However, we can take some of that confusion away by answering some of the more commonly asked questions.
In short, rental property depreciation is no different from the other items that are depreciated on your tax return. Many property owners do not realise that there are different types of allowances that you are entitled to claim on your tax returns. Many rental property owners who have purchased a property to return an income do not realise that you can depreciate what is contained inside the building and the physical dwelling against its income. You don't need to be an expert accountant yourself to take advantage of opportunities you didn't know existed. You just need a basic understanding of rental property depreciation. In addition, it's important to know who to contact to help you make all of the claim opportunities available to you. Some see rental property depreciation as one of the advantages of owning an investment property.
What is rental property depreciation?
Rental property depreciation actually has two different allowances for property owners to take advantage of:
- Plant and Equipment depreciation (the items inside the property such as washing machines, ovens, curtains)
- Building Allowance depreciation (the property itself and the materials that make it a building, such as bricks, timber, driveway concrete)
If you're not offsetting these costs in your annual tax return, you're probably not making all the claims you could be!
How does it help me?
Making claims for both Plant and Equipment depreciation and Building Allowance depreciation will reduce the amount of tax you need to pay each year. Having a schedule for these depreciations will ensure you are making the correct claims each year. And it will also serve as a reminder for what you should claim for that year. I'm sure we don't have to mention that reducing your taxable income is a good thing!
Another way depreciation schedules help you is by it being what the tax office calls a 'non-cash deduction'. What that means is that you're not repeatedly paying for the deduction every year, because you paid for it upfront when you purchased the property. Whether you knew that it was included in the price of the property or not, it's just another reason why it's worth claiming deductions against the two types of allowances.
Who can claim deprecation on their rental property?
Any property owner can make a claim on depreciation of their rental property. A common myth is that some rental properties cannot claim depreciation because they were built before a certain date. This is untrue for the most part. It doesn't matter how old your property is. Its age, however, may mean only certain allowance types are able to be claimed.
- Residential properties that were constructed earlier than July 1985 can make a claim for depreciation on the Plant and Equipment allowance only
- Residential properties that have a construction date of July 1985 or earlier can make depreciation claims on both the Plant and Equipment Allowance and the Building Allowance.
It's a good day for good news with opportunities to claim regardless of how old your property is!
Who should I contact for estimates?
Tax law states that accountants are not permitted to make estimations on the construction costs of properties built after 1985. Quantity Surveyors are the only people who can make estimates on unknown costs. They should be first on your list of people to contact.
You should ensure that the Quantity Surveyor that you employ to undertake estimations on your rental property are a member of the Australian Institute of Quantity Surveyors (https://www.aiqs.com.au). The Quantity Surveyor must inspect the property to comply with their Code of Practice. They will document all aspects that can be depreciated. Due to their training and focus, they will be much more thorough than you or your accountant could be. It's worth getting their help regardless of it being a requirement. It's also important to note that the fees charged by Quantity Surveyors are also tax deductible.
How much do depreciation schedules cost and how long do they take?
It takes between two to three weeks to complete a depreciation schedule from the date of the Quantity Surveyor's inspection. There's many aspects of a depreciation schedule that can affect its cost. Good Quantity Surveyors make guarantees to ensure that the money the claims return outweigh the costs associated with developing a depreciation schedule. Ask your Quantity Surveyor if they offer any guarantees of return for the depreciation schedule they develop for you.
Is there any easy way to figure out what my claimable deductions might be?
There's a number of depreciation calculators online, but BMT Quantity Surveyors offer a simple one of their website (https://www.bmtqs.com.au/tax-depreciation-calculator) By using the depreciation calculator you can get a good indication of what kind of claimable depreciation deductions you could expect.
What are some other myths about rental property depreciation?
Myth: You can't make a claim on a property purchased three years ago.
Fact: You can likely make a claim on a property purchased three years ago. Tax returns can generally be amended within two years, with a number of exceptions, of course.
Myth: You can't claim deductions on renovations made to the property.
Fact: You can make a claim providing you know the total cost of the renovations.
Myth: If you didn't make the renovations, you can't claim the deductions.
Fact: Even if you purchased the rental property with recently renovated components, you can claim depreciation on the renovations. However, as stated above, you must know the total renovation cost.
Australian Taxation Office
For further reading, you may like to view the ATOs page : ATO Rental Properties 2016
It's important to obtain the advice of a suitably qualified financial advisor. You need to be sure that property investment is appropriate for you to undertake. If you do embark on that path, you will be wise to appoint a qualified and experienced Tax Accountant. Do be sure to check they are an expert in property, and invest in property themselves. If you do this, then rental property depreciation is something they will adeptly take care of for you.