As a property investor, you’re likely no stranger to the concept of depreciation. But have you ever stopped to think about how this powerful tax strategy can help you maximize your returns and minimize your tax liability? In this article, we’ll delve into the world of depreciation and explore the ins and outs of claiming it on your investment property.
What is Depreciation, and How Does it Work?
Depreciation is the decrease in value of an asset over time, due to wear and tear, obsolescence, or other factors. In the context of investment properties, depreciation refers to the decrease in value of the property itself, as well as any improvements or assets associated with it, such as appliances, fixtures, and furniture.
The Australian Taxation Office (ATO) allows property investors to claim depreciation as a tax deduction, which can help reduce their taxable income and lower their tax bill. But how does it work?
The Two Types of Depreciation
There are two types of depreciation that property investors can claim:
- Capital Works Deduction: This type of depreciation refers to the decrease in value of the property’s structure and any permanent improvements, such as renovations or extensions. The ATO allows property investors to claim a capital works deduction of 2.5% per annum over 40 years.
- Plant and Equipment Depreciation: This type of depreciation refers to the decrease in value of any assets associated with the property, such as appliances, fixtures, and furniture. The ATO allows property investors to claim a plant and equipment depreciation deduction based on the asset’s effective life, which can range from 1-20 years.
How to Claim Depreciation on an Investment Property
Claiming depreciation on an investment property is a relatively straightforward process, but it does require some paperwork and record-keeping. Here’s a step-by-step guide to help you get started:
Step 1: Obtain a Depreciation Schedule
A depreciation schedule is a report that outlines the depreciation deductions you can claim on your investment property. You can obtain a depreciation schedule from a qualified quantity surveyor or a tax accountant.
Step 2: Keep Accurate Records
To claim depreciation, you’ll need to keep accurate records of your property’s income and expenses, including any depreciation deductions. You can use a spreadsheet or a property management software to help you keep track of your records.
Step 3: Lodge Your Tax Return
Once you have your depreciation schedule and records in order, you can lodge your tax return with the ATO. You’ll need to include your depreciation deductions in your tax return, along with any other income and expenses related to your investment property.
What are the Benefits of Claiming Depreciation on an Investment Property?
Claiming depreciation on an investment property can have several benefits, including:
- Reduced Tax Liability: By claiming depreciation, you can reduce your taxable income and lower your tax bill.
- Increased Cash Flow: By reducing your tax liability, you can increase your cash flow and have more money available to invest in your property or other assets.
- Improved Returns: By claiming depreciation, you can improve your returns on investment and increase your overall profitability.
Common Mistakes to Avoid When Claiming Depreciation on an Investment Property
While claiming depreciation on an investment property can be a powerful tax strategy, there are some common mistakes to avoid:
- Failing to Obtain a Depreciation Schedule: A depreciation schedule is essential for claiming depreciation, so make sure you obtain one from a qualified quantity surveyor or tax accountant.
- Not Keeping Accurate Records: Accurate records are essential for claiming depreciation, so make sure you keep track of your property’s income and expenses.
- Not Lodging Your Tax Return on Time: Make sure you lodge your tax return on time to avoid any penalties or fines.
Conclusion
Claiming depreciation on an investment property can be a powerful tax strategy that can help you maximize your returns and minimize your tax liability. By understanding how depreciation works and following the steps outlined in this article, you can unlock the hidden savings in your investment property and achieve your financial goals.
Remember to always seek professional advice from a qualified quantity surveyor or tax accountant to ensure you’re claiming the correct depreciation deductions and avoiding any common mistakes. With the right strategy and advice, you can make the most of your investment property and achieve financial success.
What is depreciation and how does it apply to investment properties?
Depreciation is a tax deduction that allows property investors to claim a portion of the property’s value as an expense each year. This is because the property’s value decreases over time due to wear and tear. In the context of investment properties, depreciation can be claimed on the building itself, as well as on any eligible fixtures and fittings.
The Australian Taxation Office (ATO) allows property investors to claim depreciation on investment properties, which can result in significant tax savings. The ATO provides a list of eligible assets that can be depreciated, including buildings, fixtures, and fittings. Property investors can claim depreciation on these assets over their effective life, which is the period of time the asset is expected to last.
How do I calculate depreciation on my investment property?
Calculating depreciation on an investment property involves determining the property’s depreciable value and its effective life. The depreciable value is the amount that can be claimed as a tax deduction each year. The effective life is the period of time the asset is expected to last. Property investors can use the ATO’s depreciation rates to calculate the depreciation on their investment property.
There are two methods of calculating depreciation: the prime cost method and the diminishing value method. The prime cost method involves claiming a fixed percentage of the asset’s cost each year, while the diminishing value method involves claiming a percentage of the asset’s remaining value each year. Property investors should consult with a tax professional or quantity surveyor to determine the best method for their investment property.
What assets can I claim depreciation on in my investment property?
Property investors can claim depreciation on a wide range of assets in their investment property, including the building itself, as well as fixtures and fittings. Eligible assets include carpets, curtains, blinds, ovens, dishwashers, and air conditioning units. The ATO provides a list of eligible assets that can be depreciated, which includes both building and plant assets.
In addition to these assets, property investors can also claim depreciation on any renovations or improvements made to the property. This includes any new fixtures and fittings installed during the renovation, as well as any structural improvements made to the building. Property investors should keep records of any renovations or improvements made to the property, as these can be used to support their depreciation claims.
Can I claim depreciation on a newly purchased investment property?
Yes, property investors can claim depreciation on a newly purchased investment property. In fact, new properties often have a higher depreciable value than older properties, which means that property investors can claim more depreciation in the early years of ownership. This is because new properties have a higher value due to the cost of construction and the installation of new fixtures and fittings.
When purchasing a new investment property, it’s essential to obtain a depreciation schedule from a quantity surveyor. This schedule outlines the depreciable value of the property’s assets and their effective life. Property investors can use this schedule to claim depreciation on their investment property and maximize their tax savings.
How long can I claim depreciation on my investment property?
Property investors can claim depreciation on their investment property over its effective life, which is the period of time the asset is expected to last. The effective life of an asset varies depending on the type of asset and its expected lifespan. For example, a building may have an effective life of 40 years, while a carpet may have an effective life of just 10 years.
Property investors can continue to claim depreciation on their investment property until the asset’s value is fully depreciated. This means that property investors can claim depreciation on their investment property for many years, often 10, 20, or even 30 years or more. It’s essential to keep records of depreciation claims, as these can be used to support tax returns and minimize the risk of audit.
Can I claim depreciation on an investment property that is not rented?
Yes, property investors can claim depreciation on an investment property that is not rented, but only if the property is genuinely available for rent. This means that the property must be advertised for rent and the owner must be actively seeking tenants. If the property is not genuinely available for rent, the ATO may not allow depreciation claims.
Property investors who own a property that is not rented should keep records of their attempts to rent the property, including any advertising expenses and correspondence with potential tenants. This documentation can be used to support depreciation claims and demonstrate that the property is genuinely available for rent.
How can I maximize my depreciation claims on my investment property?
To maximize depreciation claims on an investment property, it’s essential to obtain a depreciation schedule from a quantity surveyor. This schedule outlines the depreciable value of the property’s assets and their effective life. Property investors can use this schedule to claim depreciation on their investment property and maximize their tax savings.
Property investors should also keep accurate records of any renovations or improvements made to the property, as these can be used to support depreciation claims. Additionally, property investors should consider using the diminishing value method of depreciation, which can result in higher depreciation claims in the early years of ownership. It’s also essential to consult with a tax professional or quantity surveyor to ensure that depreciation claims are accurate and comply with ATO regulations.