Being tax savvy can ensure that you remain compliant with tax law and maximise your cashflow.
A property depreciates in value over time. However, a tax claim can be made on this loss, and it even relates to appliances, plant and equipment items, and the property’s structure. These costs can be deducted from your total taxable income as deprecaition, helping to bolster your cash flow, and lowering the amount of tax you will ultimately pay.
Depreciation expert and director of Washington Brown, Tyron Hyde, recently sat down with Your Mortgage to tell us everything investors need to know about depreciation.
Following the depreciation laws that were passed in 2017, there’s a question he has become familiar with: Is it still worthwhile lodging a depreciation claim on an older property?
“Whilst there were some changes to depreciation, the rules still enable you to claim the depreciation of a building regardless of its age. However, if you buy a second-hand investment property now, residential only, you can no longer claim the depreciation on the ovens, the dishwashers, etcetera,” Hyde shares.
“If it’s brand new, you can still claim both, but the moment you resell that residential property, that new investor cannot claim the depreciation on the ovens and dishwashers anymore.”
These entities only represent around 10% to 15% of a property’s overall construction costs, leaving 85% of the property still eligible to be claimed, Hyde explains.
The only way of uncovering the amount you are eligible to claim on a property’s depreciation over time is by purchasing a depreciation schedule, which can set you back from anywhere between $450 and $800 (generally tax deductible).
If a property has been built before 1987, and it hasn’t had additional work or improvements performed on it, Hyde says that it may not be worthwhile to obtain a depreciation schedule. That’s not to forget that holding such a property is a rare occurrence, simply because it would have likely had a face-lift done to it for it to be suitable for tenants over the last 30-plus years.
In saying all of this: approximately how much can an investor expect to claim in depreciation on an older property?
“As an example, if you were to buy a property built between 1987 and the year 2000, you still may be able to claim $4,000 on the first year and $40,000 over the next ten years. And that’s assuming that there’s been no renovation on that property,” Hyde says.
“Now, if you were to buy a property built between 2000 and the year 2018, roughly you might be able to claim $6,000 in the first and maybe $60,000 over the next ten years.”
But it’s a different story when it comes to newly built properties, as Hyde shares.
“If you were to buy a brand new property, you may be able to claim $15,000 in the first year and maybe up to $90,000 over the first 10 years, and the difference is that you can still claim depreciation on the plant equipment and the building allowance.”