Q: It’s coming up to tax time and last year my tax accountant suggested that I get a depreciation report done on my investment property to help increase my rental return, but I don’t really understand why or what it is. Are property depreciation reports worthwhile for investment properties?
A: It sounds like you have a sensible tax accountant who is trying to help you get the most out of your investment property costs that you can claim back on tax.
A property depreciation report, or depreciation schedule, can help you pay less tax and is one of the tax deductions you should be aware of when investing in property.
Similar to how you can claim wear and tear on a work car that you own, you may also be able to claim wear and tear on your income-earning rental property.
Depreciation can be worked out in two different categories; ‘plant and equipment’ – things like dish washers, ovens, carpet, blinds etc, and ‘building’ – structural elements like concrete and brickwork.
You can’t just make up these claims or numbers yourself; you need a qualified quantity surveyor to inspect your property and produce a bespoke property depreciation schedule for you. The ATO also has rules around how much assets, like property, decrease in value as they age.
For example, the ‘building’ of an investment property has depreciation available over 40 years (part of the ATO’s rules). This means that a new building that cost $400,000 to build would give you a $10,000 tax claim each year for 40 years (i.e. 2.5% per year).
If your rental property is older than 40 years, you can claim depreciation from the ‘plant and equipment’ aspects. The tax office lists all the items you can claim and for how long, also called the ‘effective life’.
Generally, the newer the property the greater your depreciation will be and this is one of the pros to buying a newer investment property. I still think it’s worthwhile getting a depreciation report produced on older properties too.
There are many benefits of having a depreciation report, including:
- You only need to get the depreciation schedule produced once and it should contain expected depreciation amounts for up to 40 years;
- Some companies offer a money back guarantee on the cost of the report if you don’t get at least double the cost of the report back in your first tax return;
- The cost of the report itself should be tax deductible;
- The best time to get a depreciation schedule created is when you settle your investment property, but it can be done at any time, and even on very old properties (though if it was built before 1985 you might only be able to claim on plant and equipment); and
- Your accountant may even be able to claim depreciation backdated by up to two years, so you can recoup some additional cash back on previous years’ tax returns.
The cost of the report varies by company and the size, location and other factors to do with your investment property, but generally from my experience they can be between a few hundred to several hundred dollars for an average size two to three bedroom apartment.
The quantity surveyor will also need to physically inspect the property, which might be a pain if you have tenants; but I think it’s worth it.
With the end of the financial year almost here, now might be the time to shop around for a few quotes to see if you can get one done before June 30. That way, you can get the most out of all those benefits I’ve mentioned above in only a couple of weeks’ time.
You can find more tax tips for investors in Aussie’s free Property Investing Guide.
Do you want to ask John a question? Submit it here and check back each Sunday to see if it’s been answered.
If you found this article useful please share it using the buttons below.