The ABC of tax depreciation explained for first time property owners
In my last blog, I highlighted a recent survey which showed younger property investors were the most likely group of investors to lose out on tax depreciation benefits associated with owning an investment property.
I thought that it was therefore opportune to explain to anyone considering buying an investment property for the first-time what tax depreciation is and how they can benefit from it.
The fact is that tax deprecation benefits associated with owning an investment property can be very significant, so it is important that property investors claim their full tax deprecation benefits each financial year.
Understanding how you can benefit from tax depreciation is as simple as owning a car.
If you bought a new car, you will understand that every year it depreciates in value. The same principle applies to property. If a property is being used for investment purposes, the Australian Tax Offices allows the investor to claim the decline in value of the building by way of a tax deduction.
The amount that can be deducted depends on the age and value of the building, but it varies between 2.5% to 4% of the capital works value of the building each year.
An investor can claim these tax benefits by using the services of the tax depreciation specialist who prepares a tax depreciation schedule.
A depreciation schedule is a report undertaken by a quantity surveyor company (such as DEPPRO). It generally should be undertaken when the investor buys the property.
A Quantity Surveyor, also known as a Construction Economist, or Cost Manager, is one of a team of professional advisors to the construction industry. As an advisor, they estimate and monitor construction costs, from the feasibility stage of the project through to the completion of the construction period. After construction, they prepare tax depreciation schedules for property tax depreciation purposes.
The quantity surveyor produces a tax depreciation schedule for clients which is a physical snapshot of the property.
For example, DEPPRO sends out a staff member to the client's property and they fill in a report and take pictures of the property to estimate depreciation benefits.
This depreciation report itemises the age of the property, what materials it is built from, the internal fittings such as carpets, window treatments, appliances etc. An estimated value is placed against these various items and they are depreciated depending on their age and value.
The investor gives this report to their accountant and this is used by them to work out how much tax benefits they can obtain each year.
You only need to do one depreciation report for a property, and it can be updated each year by the accountant if the investor for example, installs a new kitchen.
The cost of a depreciation report as prepared by DEPPRO is around $600 and this is tax deductible and covers the lifetime ownership of the investment property.