Property Depreciation 101

Property depreciation 101- by BMT Tax Depreciation. Owners of income producing properties are eligible for a number of taxation benefits however many of them fail to take advantage of those deductions available via depreciation.

In fact, BMT has found that around 80 per cent of investors fail to maximise the depreciation deductions they can claim.

“A number of investors are unaware of depreciation because it is considered a non-cash deduction. This means the investor does not need to spend any money to be eligible to claim it,” said Bradley Beer, the Chief Executive Officer of BMT Tax Depreciation.

“While investors are aware they can claim expenses such as interest on their loans, council rates, Property Management fees and repairs and maintenance costs, depreciation is a hidden factor often not considered,” said Bradley Beer.

To explain property depreciation further, the experts at BMT have provided a complete guide which helps to answer some of the most frequently asked questions and an example scenario to demonstrate how claiming these deductions will improve your cash flow.

What is property depreciation?

As a building gets older, its structure and the assets contained within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a tax deduction.

What can you claim?

Depreciation deductions are split into two distinct categories:

● Division 43 capital works allowance
● Division 40 plant and equipment depreciation

The capital works allowance relates to claims for the wear and tear that occurs to the structure of the property and any fixed items. Examples of depreciable items which can be claimed under this category include the roof, walls, doors, kitchen cupboards, bathroom tubs and toilet bowls.

As a general rule, any residential building where construction commenced after the 15th of September 1987 will entitle its owner to capital works deductions. These deductions can be claimed at a rate of 2.5 per cent per year for up to forty years.

Owners of older buildings constructed prior to 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.

Plant and equipment depreciation can be claimed for the easily removable fixtures and fittings found within the property. There are more than 6,000 different depreciable assets recognised by the ATO which investors can claim. Some examples include carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.

Unlike structural items, no date restrictions apply when claiming depreciation on plant and equipment assets. Each of the assets is assigned an individual effective life and depreciation rate by which depreciation should be calculated.

How will claiming depreciation help an investor?

Including a depreciation claim in your annual income tax return can make a significant difference for an investor.

The below scenario demonstrates an investor’s situation with and without a depreciation claim. In this example, the investor purchased a $495,650 town house and rented the property for $505 per week or $26,260 per annum. Expenses for their property including interest, property management fees, rates, repairs and maintenance total $35,639.

In this example, without depreciation, the investor is experiencing a weekly loss of $114 after tax.

After consulting one of the expert team at BMT they discovered they could claim $9,500 in depreciation in the first full financial year. By taking advantage of depreciation, their weekly loss after tax is reduced to just $46 per week. The depreciation claim improved their annual tax refund by $3,515 in the first financial year alone.

Who should you contact to calculate and maximise your deductions?

It is recommended that investors contact a Quantity Surveyor, such as BMT, to complete a comprehensive tax depreciation schedule for their property to ensure their deductions are maximised.

Quantity Surveyors are recognised under Tax Ruling 97/25 as one of a few select professionals with the knowledge necessary to estimate construction costs for depreciation purposes.

What is involved in completing the depreciation schedule?

As part of the process of preparing a schedule, a depreciation expert will visit the property to take measurements and photograph all of the assets contained within the property. They will also take detailed notes about any structural improvements or additions that have been made to the property.

They will work with your Property Manager to gain access to complete the inspection with your tenants and provide a copy of the depreciation schedule to both you and your Accountant so they can process your claim at the end of each financial year.

Property investors who would like a free assessment of the deductions available in any income producing property can request an estimate online or contact one of the expert staff at BMT on 1300 728 726.

Article provided by BMT Tax Depreciation.

Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.

Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia-wide service.