For most property investors, depreciation is one of the biggest deductions they can claim come tax time. However, in our experience, it is also one of the most overlooked, with many investors missing it completely. This is particularly true for first timers, who are usually red-hot on claiming other expenses but generally forget about depreciation.
To help address this, we want to take a closer look at what depreciation is and how it works. We will also explore how it is calculated and how you go about claiming it.
How does depreciation work?
Just like any other type of asset, an investment property experiences wear and tear, and this can affect its value. For example, over time, fixtures will show signs of regular use and structural elements will begin to weaken. As it is effectively a cost of investing, this gradual decline in value – or depreciation – can be claimed as a tax deduction.
For investment properties, there are two types of depreciation you can claim:
Once it has been calculated, a property’s depreciation works much like any other investment expense. This means it can be claimed as a deduction on your annual tax return to help reduce your taxable income. This, in turn, lowers your tax obligation and reduces the amount you owe the tax office.
How is depreciation calculated?
Another way to look at it is that depreciation spreads the cost of an asset out over its useful life. For example, let’s say the oven in your property is worth $1,500 and has a 10 year lifespan. This means that, for tax purposes, the oven depreciates $150 a year, for 10 years.
While this calculation seems fairly straightforward, when you consider how many items are depreciable, it can get quite complex. This is where a depreciation schedule can help by clearly setting out how much you can claim each year. In addition to making it easier to prepare your tax return, this also reduces the risk of you missing a deduction.
To be valid, a depreciation schedule needs to be prepared by a qualified and accredited quantity surveyor. To do this, they will need to inspect the property in person and document all the depreciable items. They will then work out each item’s value and remaining lifespan, and provide a detailed report of the claimable deductions.
So… do I really need a depreciation schedule?
Put simply, yes – if you would like to enjoy the financial benefits of depreciation, you need a depreciation schedule. In fact, each investment property you own should have its own depreciation schedule.
Ideally, this should be prepared right after settlement (for existing properties), or after the property is completed (for new builds). This will help make sure the schedule reflects the true condition of the property at the point of purchase. Similarly, if you renovate an investment property, you should have your depreciation schedule updated as soon as works are complete.
It is also worth noting that the cost of having a depreciation schedule prepared is also tax deductible. For further peace of mind, most of the leading quantity surveying companies also provide a money-back guarantee. This usually means that, if your first-year tax savings are less than twice their fee, they will refund your money.
Want more information?
If you would like to discuss the ins and outs of depreciation schedules further, contact Search Party Property. As property investment specialists, we understand how they work and the significant financial benefits they can provide. We can also connect you with reputable quantity surveyors, if you need schedules prepared for any of your properties.