Are you maximising your tax depreciation on your investment property?
Property depreciation is a tax benefit that many investors often don’t learn about until they’ve owned a property for a number of years. Depreciation may see you enjoying more money back in your pocket from the moment you settle an investment property purchase.
In the same way you can claim the wear and tear of a computer against your taxable income for a business, you as a property investor can claim the wear and tear of a property investment against your taxable income. The depreciation costs are already embedded in the property itself. This means you can claim a deduction for items that already come with the property.
Property depreciation is calculated using 2 methods:
1. The cost of construction to be depreciated over a 40-year period (Division 43)
2. The cost of fixtures and fittings (Division 40)
Division 43 Depreciation (Capital works deduction)
Division 43 relates to the depreciation of a building’s structure and fixed items. An example of a fixed item would be a roof, wall, window, door, toilet, bath or kitchen cupboards and tiles. This deduction under Division 43 is also called a capital works deduction.
The Division 43 capital works deduction is a straight-line depreciation for most newer buildings at 2.5 per cent – so this method evenly distributes the cost over forty years. Division 43 deductions typically make up at least 85 to 90 per cent of the total claimable amount.
For example: If we say in the year 2020 you can claim $5,000, this amount will come directly off your taxable income. If you’re on the highest marginal rate of 47%, that means that you get a net return of $2,400. So, a depreciation schedule can be a really worthwhile investment.
Division 40 Depreciation (Capital allowance)
Division 40 is about the depreciation of plant and equipment, or the cost of fixtures and fittings. For property investors these are the mechanical or easily-removable assets found within a property, including the furniture and fittings. Examples are carpets, hot water systems, garbage bins, smoke alarms, air conditioners, and blinds or curtains. These deductions, under Division 40, are often referred to as a capital allowance.
This capital allowance under Division 40 allows investors to choose between two methods of claiming depreciation for any property – the diminishing value and the prime cost methods. Both methods claim the total depreciation value available over the life of a property, but use a different formula.
Find out how much you can claim
To find out how much you can claim you need to engage a quantity surveyor who will go out to the property and work out what each item costs to build. They will break down the construction costs of the property into things like bricks and concrete, and ovens and dishwashers. The quantity surveyor will then provide you with a tax depreciation report (or depreciation schedule) that itemises those costs and how much you can claim for each of those items. If you would like more information about depreciation schedules and how to choose a reputable quantity surveyor, please contact the Infocus Property Advisory.
