Tax Depreciation FAQs
What is depreciation?
As your investment property ages, the building itself actually depreciates in value, even as the overall value of your investment increases. This isn't as surprising as it first sounds; after all, your land may get more desirable with age, but most buildings certainly don't. In other words, your land is responsible for the increase in value - the house or unit on the land just gets old and tired.
Why is depreciation tax deductible?
Much of your property's depreciation is considered an investment expense, making it tax deductible. In other words, you can reduce your taxable income, and therefore pay less tax. Generally, this equates to a significant tax refund at the end of each financial year.
How much depreciation is tax deductible?
How do you know how much depreciation is tax deductible? Unfortunately, this is where it gets tricky. The Australian Taxation Office (ATO) has a lot of complicated rules and regulations governing what's deductible depreciation and what's not. Even your average tax accountant doesn't have the specialist expertise to ensure you claim all the depreciation you should and, just as importantly, nothing you shouldn't. In fact, these days most tax accountants simply advise you get a depreciation expert, like Asset Economics, to prepare a detailed tax depreciation report for your investment property.
Only then can you be sure that you're not missing out on depreciation-related deductions you're entitled to, and that you're not making illegal claims. (If the ATO catches you claiming deductions you're not legally entitled to, you will have to pay them back and you can be fined.)
What are property tax allowances?
Property tax allowances form part of the Income Tax Assessment Act 1997 (hereafter called 'the Act') and provide an opportunity for owners of income producing property to reduce their assessable income. There are a number of property tax allowances available to property owners, investors, and developers, including allowances for building structure and depreciation on plant items. Property tax allowances are often simply referred to as property depreciation.
Can property tax allowances increase my investment return?
Property tax allowances can reduce an investor's assessable income, and by correctly claiming and maximising these deductions, investors can significantly enhance the after tax return from their investment and generate a healthier cashflow.
When should I obtain a property tax schedule?
The best time is usually as soon as possible after settlement. Our staff can then identify items included in the original purchase price as distinct from any items and/or expenses incurred during the remaining period of the property ownership. The ability to analyse these costs allows for greater accuracy and maximum returns from the calculation of depreciation and building allowances.
What is a Quantity Surveyor?
Quantity Surveyors are involved at various stages of the construction process, typically prior to construction, during construction and following completion of the works.
The difference between a repair and improvement
It is important for property investors to know the difference between a repair and an improvement so that you maximise your claim legally. A repair is generally defined as 'restoring something to a working condition' and usually involves fixing part of an asset. Repairs can be claimed as an immediate deduction.
An improvement is when you improve the condition of the asset and these need to be depreciated over the ATO’s appropriate effective life. So buying a brand new stove to replace the 'tired & old' stove is an improvement, as is replacing the entire roof or painting the entire property.