Four property depreciation myths debunked

By Michael Mata
As with any activity that produces an income, there are various tax deductions that are available to property investors.

The property tax deduction recognises the fact that the building itself, as well as its plants and equipment, will wear out over time and will eventually need to be replaced. (Plants and equipment refer to items within the building like ovens, carpets, blinds, and dishwashers.)

It doesn’t matter that these items were paid for by another party, such as a developer or previous owner, as you, the current owner, can continue to claim deductions as these items continue to depreciate in value.

As with any tax deduction, depreciation reduces your taxable income. For example, if your income was $100,000 for that year, and you claim $10,000 worth of deductions, you only have to pay tax on the $90,000.

While claiming depreciation deductions on your investment property can save you thousands in tax dollars, “Depreciation should not be your initial focus when purchasing an investment property,” said Tyron Hyde, chief executive of Washington Brown, one of Australia’s oldest and most respected quantity surveying organisations.

“You should, of course, first consider things such as new infrastructure being built around the area, the rentability of the property, rental yield, and most importantly, buying the property at the right price.”

Whether through bad advice or insufficient knowledge, many investors don’t claim depreciation and are paying more tax than necessary.

Listed here are four myths about depreciation and the truths behind them.

Myth #1: Depreciation is a DIY undertaking.

Some property investors think they can save money via a DIY approach to depreciation. While this tactic might save them a small amount of money in the short term, incorrect measurements and failure to include all items eligible for depreciation will lead to missed deductions. These missed deductions could total tens of thousands of dollars over your ownership of the property.

The Australian Taxation Office (ATO) suggests using only licensed quantity surveyors to estimate depreciation costs and original construction costs when those figures are unknown. The Australian Institute of Quantity Surveyors’ (AIQS) Code of Practice also says that the site inspections are necessary to satisfy ATO requirements.

In addition to ensuring that you don’t miss out on any eligible deductions, a comprehensive tax depreciation schedule prepared by an accredited firm can protect you in an event of an audit.  

Myth #2: Depreciation is only for new properties.

All investment properties, both new and old, are eligible for depreciation. Even properties built before 1985 (when the Building Allowance was introduced) are worth depreciating.

The common misconception that older buildings aren’t eligible for depreciation centres on the fact that you cannot claim the building allowance component of depreciation on residential properties built before the 18th of July, 1985. While this is true, it simply means that you cannot claim the depreciation on the structure of the building.

You can still claim the plant and equipment items in older properties that were built before this date.

Myth #3: All depreciation reports are the same.

A comprehensive tax depreciation schedule prepared by an industry-leading quantity surveying firm can improve the cash-flow position of a property. Variations in methodology and differences in values and age estimates between firms can make a huge difference to the permissible deduction figure produced. The degree of scrutiny and time spent on the report will affect the result too as the inclusion of all depreciable items is crucial to maximising deductions.

Myth #4: You can’t claim on works done by the previous owner.

All works, including those done and paid for by the previous owner, are entitled for depreciation. In addition to visible renovations and additions, the less obvious improvements, such as plumbing and electrical wiring, can also be claimed.

While it is unlikely that a new owner would be able to access actual cost information regarding any works completed by the previous owner, the ATO states that a quantity surveyor is authorised to estimate the costs for any works on a property completed after July 1985 for residential properties, and July 1982 for commercial properties, where the actual costs aren’t known.

 

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