Property Depreciation 101

Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.

Seasoned property investors know all about this one. In fact, some will take depreciation into account before purchasing their investment. But it’s not just for the pros. Anyone who purchases a property for income-producing purposes is entitled to depreciate both the items within the building and the cost of the building itself – against their assessable income.

Every year, thousands of dollars go unclaimed by property investors who are none the wiser. All it usually takes is a qualified quantity surveyor to inspect your home and prepare a report for your accountant. The savings can be substantial.

What is property depreciation?

There are two types of allowances available:

• depreciation on Plant and Equipment;
• and depreciation on Building Allowance.

Plant and Equipment refers to items within the building like ovens, dishwashers, carpets and blinds etc.

Building Allowance refers to construction costs of the building itself, such as concrete and brickwork. Both these costs can be offset against your assessable income.

Depreciation is known as a “non-cash deduction” because it’s a deduction that you don’t have to pay for on an ongoing basis – the deductions are in-built within the purchase price of your property. All other deductions, such as interest, levies, will cost you and require payment on an ongoing basis.

Is my property too old to claim depreciation?

The simple answer is no. If your residential property was built after July 1985 you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment. But it will still be worthwhile.

Commercial and industrial properties are subject to varying cut off dates.

Who should calculate the depreciation?

If your residential property was built after 1985 your accountant is not allowed to estimate the construction costs. Similarly, real estate agents, property managers and valuers are not allowed to make this estimate.

Tax Ruling 97/25 issue by the Australian Taxation Office (ATO) has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown.

Whereas accountants can offer advice around other aspects of tax depreciation, construction costs and property depreciation are technical in their own right. quantity surveyors are specialists in the accurate measurement of construction costs with a view to maximizing a client’s financial position in relation to their property assets.

Will my property need to be inspected?

The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements.

A quantity surveyor will ensure all depreciable items are noted and photographed. This ensures you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit.

The best time to get an inspection of your property is immediately after settlement and hopefully just before the tenant has moved in.

However, even if you bought the property three years ago, you can I still make a claim in most circumstances. Your accountant can amend your previous tax returns up to two years back. There are some exceptions, so contact your tax agent or the ATO for clarification.

Can I still claim if my property is renovated?

Yes. The Quantity surveyor will need to know how much you spent on renovations. This is an ATO obligation. If the previous owner completed the renovations, you are still entitled to claim depreciation. In either case, where the cost of renovation is unknown, a Quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation.

How much will my depreciation schedule cost?

The cost of preparing a tax depreciation schedule varies depending upon the type of property you’ve purchased, location, size and numerous other factors. Generally, the leading quantity surveying companies offer a money back guarantee to save you twice your fee in the first year or they give you the report for free.

So, you have nothing to lose – and deductions to gain! Quantity surveyors’ fees are 100% tax deductible.

– Prepared by Washington Brown, Quantity surveyors