As a property investor, you’re probably searching for methods to enhance your rental income and minimise your taxable income. One frequently overlooked approach is claiming property depreciation. By creating a tax depreciation schedule for your residential rental property, you can improve your cash flow through annual tax deductions. For brand-new properties, this schedule facilitates claims for deductions on capital works and plant and equipment, thereby maximising your tax advantages each financial year. However, it’s important to note that second-hand residential properties do not offer depreciation deductions on plant and equipment.
What is a tax depreciation schedule, and how can it improve your tax return?
A depreciation schedule is a comprehensive report detailing the tax deductions available for your investment property. It breaks down the property’s value, including construction costs as well as all fittings and fixtures, enabling you to identify the tax-deductible expenses you can claim.
This schedule encompasses plant and equipment assets and capital works, indicating the depreciation of these assets and their future depreciation. This allows property investors to assess the amount they can claim for tax depreciation, offering a clear financial advantage.
Benefits of a depreciation schedule for your investment property
Engaging a quantity surveyor to professionally prepare your tax depreciation schedule presents various distinct benefits for property investors:
- Easier property investment decisions
This can make your first or subsequent investment property more financially attractive, facilitating your wealth-building efforts in real estate.
- Improved cash flow
Accurately calculating your depreciation can help shift a negatively geared property towards a more positive cash flow situation, thus lowering out-of-pocket expenses.
- One-time expense with ongoing benefits
Unlike many property-related expenses, a depreciation schedule is a one-time investment, permitting you to claim tax deductions year after year without incurring further costs.
- Tailored to maximise deductions
The schedule ensures you claim every eligible deduction for both new and existing properties, adhering to all Australian tax laws and guidelines. This aids in maximising the financial benefits of your investment.
Case studies related to depreciation schedules for rental properties
Depreciation on Newly Constructed Rental Property
Scenario:
John is buying a newly constructed rental property and seeks clarification on claiming depreciation for capital works and plant and equipment.
ATO Ruling:
The ATO confirms that John can claim deductions for capital works, with a deduction rate of 2.5% annually for residential properties built after September 16, 1987. However, John must obtain a quantity surveyor’s report or utilise reliable documentation, such as builder’s costs, to establish the construction costs.
Additionally, the ATO states that plant and equipment assets (e.g., carpets and air conditioning units) can be depreciated. Since the property is newly constructed, John can claim depreciation based on the effective life of the asset.
Key Takeaway:
New construction offers maximum depreciation benefits as capital works, plants, and equipment can be claimed without restrictions.
Depreciation on Second-Hand Rental Property
Scenario:
Mary is purchasing an older rental property with existing assets and wants to know about claiming depreciation on the plant and equipment within the property.
ATO Ruling:
Mary can claim capital works deductions if the construction began after September 16, 1987, and if sufficient evidence (e.g., historical records or a quantity surveyor’s report) is available.
However, the ATO clarifies that under legislative changes effective July 1, 2017, deductions for second-hand plant and equipment assets are generally not allowed for residential rental properties. Nevertheless, Mary may claim depreciation if she purchased the assets herself after acquiring the property or if they were first used as new for rental purposes.
Key Takeaway:
According to the 2017 regulations, plant and equipment depreciation for second-hand properties is limited, underlining the significance of taxpayers’ new asset purchases or enhancements.
General Implications for Investors
- Use of Quantity Surveyors: The ATO recommends hiring quantity surveyors to estimate construction costs when records are unavailable, ensuring adherence to tax laws.
- Substantiation: Maintaining adequate records is crucial to support claims, particularly for older properties where construction date evidence and costs may be harder to access.
- Strategic Renovations: To maximise deductions, taxpayers may consider upgrading plant and equipment assets after acquiring the property, enabling depreciation claims under the new provisions.
Given the complexities surrounding depreciation claims for rental properties and the associated benefits, seeking expert advice is advisable. For more information on tax-related queries, visit our Tax page.