A Beginner’s Guide to Property Depreciation

Starting a property investment can be both exciting and daunting at the same time. You need to choose the right property, conduct market research, market your investment, and maintain it moving forward—all of which can be expensive. To help offset some of these costs and make sure that you are saving as much money as possible for your future goals, you should take advantage of tax depreciation deductions.

Property depreciation is a complicated topic to understand, especially for first-time property investors. There are numerous rules and factors that must be considered when calculating the deductions that you can claim for in regards to your investment. While it is not necessary to be an expert in property depreciation, having a basic knowledge of what is involved will help you maximize your claim. 

To ensure you claim the maximum deductions available to you, it’s wise to consult with a specialist in tax depreciation in Sydney about how you can significantly reduce your taxable income at year’s end.

What is Property Depreciation?

Property depreciation

Property depreciation is the process by which a property’s value decreases over time due to wear and tear. When you purchase a building or factory that you intend to use for business purposes, such as a retail space or office building, you can claim deductions related to wear and tear on your assets. Property owners in a range of different building types including, but not limited to, commercial properties such as retail spaces, hotels, warehouses, offices, restaurants and many others can claim capital works deductions and depreciation for plant and equipment assets.

What are the types of Property Depreciation?

Property investors often struggle to understand the differences between the two types of depreciation available. One of the main things that confuse many investors is the difference between the two types of depreciation that are available. Below, we will take a look at each type so that you can be sure that all items on your tax return are properly classified as well as claimed for.

  1. Capital Works Deductions

    Capital works deductions refer to deductions available to cover aspects of the building’s structure. These deductions also relate to items considered permanently fixed to the property, such as windows, doors, kitchen fittings, bathroom fittings, tiles and foundations.

    In commercial and other non-residential income-producing properties, capital works deductions can be claimed at a rate of either 2.5% or 4% of the property’s listed building cost. However, this will depend on the type of building it is, as well as its age.
  2. Plant And Equipment Deductions

    A tax deduction may be claimed for plant and equipment, including any removable or mechanical fittings or fixtures in the property that can be removed. The perceived life of each item will be taken into account when determining whether or not items can be included in the relevant tax ruling. As an investor, you can claim tax deductions for up to six thousand different assets. Items such as ovens, air conditioners, refrigerators, freezers, dishwashers, hot water systems, smoke alarms and range hoods are included along with many more commonly found items.

How old is your property?

When deciding whether to invest in property, investors often consider the age of the property. Investors are worried that they may not be able to claim for depreciation because older properties do not receive higher deductions because of increased construction costs and the higher starting value of the new property and new fittings. However, remember that just because a property was not built recently does not mean that you cannot claim for depreciation.

Investors in residential property can claim capital works deductions for structures built after September 15th 1987. If your investment property is older than that, it must be renovated for you to claim capital works deductions. Even if the previous owner carried out renovations on the property that fall within the legislated time frame, you could still claim for capital works deductions on your property.

When calculating deductions for plant and equipment, the age of the property is irrelevant. Depreciation for plant and equipment assets is based on the quality and condition of each individual item, and is calculated on their perceived lifespan, starting from the date the settlement is finalised.

Will the property need to be inspected?

To make the most of your property depreciation deductions, it is best to enlist the help of experts, including a qualified quantity surveyor and accountant.

A quantity surveyor will be able to carry out a depreciation schedule to make sure you claim the correct amount of depreciation and, as a result, receive a greater deduction on your income.

An inspection of your property is necessary in order to make a record of all depreciable assets, such as flooring and tapware. Each item will need to be photographed, measured and counted.

The quantity surveyor will also take note of any structural improvements or additions that have been made to the investment property.

From this information, a tax depreciation schedule will be prepared by the quantity surveyor and this will be used by your accountant each year to calculate depreciation deductions.

Maximise your property depreciation claim

A qualified quantity surveyor who specialises in calculating building costs for depreciation purposes is required to maximise your property depreciation claim. A quantity surveyor is traditionally a construction cost consultant, making them the ideal professionals to calculate the costs of building your property.

There are a limited number of professions that are recognised under Tax Ruling 97/25 as having the necessary construction costing skills to calculate building costs for depreciation purposes. A quantity surveyor falls into this category, and as such, is essential for maximising your property depreciation claim. With their construction expertise and knowledge of taxation legislation, they can perform a thorough inspection of your investment property to create a tax depreciation schedule, outlining the deductions that you can claim.

You can use this report to your accountant’s advantage so that your annual income tax return will look more promising. By doing so, you will be able to minimise your taxable income through your property depreciation claim.

You can lower your taxable income

An effective property tax depreciation schedule can lower your tax liability come end-of-year—potentially saving you hundreds, or even thousands of dollars. As a property investor, it’s crucial to have a steady cash flow to manage your property well. By speaking to a property tax deduction specialist, you can increase your available cash flow, giving you more leeway to maintain and invest in your properties. This is advice that holds true whether you’re a first-time property investor or a seasoned pro. Talking to a property depreciation specialist is always a wise move to see how much money you could potentially save each year.

If you make higher profits at the end of the year, you will have more money available to make improvements to your investment property and expand your portfolio over time. As your property portfolio expands, you will be able to claim even more property tax deductions on each of the properties that you own. If you choose the right properties to grow your portfolio and take advantage of the available tax breaks, you will be able to lower your taxable income at the end of the year, leaving you with more money to reinvest in your business or to enjoy in any way you see fit.

BloomWealth Accountants will Help You

If you need someone who has experience in helping people with property investments, a good place to start is by talking to BloomWealth’s Medical Financial Advisors.

BloomWealth are specialist medical accountants for doctors and health professionals. We are qualified tax accountants as well as wealth creation advisors/financial planners. The monetary aspect of your medical practice and personal finances are handled by a competent and reliable expert.

Book in for a Free Financial Health Check or contact us to speak further about our full range of services.

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