Why you should back-claim depreciation
Depreciation is an element often overlooked by property investors, and yet, while there is an initial outlay to set up a schedule, the tax-deduction benefits can be lucrative.
Here we take a look at what depreciation is, and why, if you’re not doing it already, you should consider back-claiming.
What is depreciation?
Like a car, there are certain things in your property which will lose value over time because they become worn out and eventually need to be replaced.
Depreciation is calculated and projected (or forecasted) over several years, and it’s split into two types.
- Capital works (Division 43): This is the construction costs to the building itself. For example, items like brickwork and concrete. The length of time the ATO says a building lasts before it needs replacing is 40 years, so this is the length of time the depreciation is calculated.
- Plant and equipment (Division 40): These are assets that have a limited effective life, such as the items mentioned earlier, carpet, air conditioners etc. It might even include ovens, microwaves, and other white goods if the landlord has bought them. Like the items listed in the capital works, the ATO lists all items you can claim and for how long the item lasts (known as ‘the effective life’) before it needs replacing.
What are the benefits?
Depreciation is considered a tax-deductible expense.
While you will have to pay a qualified surveyor to inspect your property and prepare a report, it is usually a one-off cost, and this cost too is usually tax deductible. Generally, the cost of a surveyor usually easily outweighs the benefits you will receive as a result of the depreciation tax deductions.
Can I claim depreciation on an older property?
While, the depreciation tax breaks are higher on newer properties they are still available on older ones.
We all love a bargain and like to save money, but it’s worth noting, you can only claim the decline in value of new depreciating assets but not for second-hand or used assets, and you can only claim depreciation on items you personally bought, not what the previous owner put in, even if it hasn’t been used. For example, the previous owner may have put a new carpet in the empty property in order to better present it for selling.
But if you are renovating the older property, this will be classed as a capital works deduction, so once again, owners of older properties will be able to claim against this.
Can I back date it?
A depreciation schedule can be prepared at any time, and yes, you can back-date it, for up to two years.
It’s easy to do! Here’s how:
- Engage a qualified quantity surveyor to prepare a depreciation schedule (physical inspection, asset valuation, capital works, Division 40 items).
- Provide the schedule to your accountant to amend up to two prior years of returns.
- Claim the schedule cost in the current tax return—it offsets immediately.
- Continue annual claims for up to 40 years (subject to asset life) from the report date.
To give you some idea of the potential savings you could make, ATO has some information on depreciating assets in rental properties: How to claim a deduction for depreciating assets and work out decline in value at this link here.
With recent KPMG analysis revealing our region is still one of the net internal migration hot spots in Australia, and rental property vacancies for the Hunter region continue to be low, now is the time to review your finances and see what you can afford.
If you have any queries at all about property investment, we are here to help; we give you the information you need to know so you can make informed decisions.
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