With current housing affordability issues making it increasingly harder to enter the market, many Australians are turning to rentvesting to get their foot on the property ladder. That is, buyers are purchasing an investment property in a place they can afford, while renting in a place they would like to live. It has become popular for a number of reasons including affordability, flexibility, lifestyle choices and providing a number of tax deductions.
This increasingly common trend shows that cash flow and affordability are big concerns for rentvesters. The good news is that once they’re on the property ladder, there is an easy way to boost cash flow, both immediately and for years to come, and this is by claiming property depreciation.
Property depreciation is one of the most often misunderstood tax deductions available to property investors. This is because it is a non-cash deduction, and therefore, a ‘hidden’ source of cash flow.
According to BMT Tax Depreciation, research shows that only 20 per cent of property investors make proper use of this tax tool, which can bring in an additional $5,000 to $10,000 for residential properties in the first year alone and continue to supplement an investor’s income each financial year.
So how does this work and what exactly is property depreciation?
What is depreciation?
As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction. Any property owner who obtains income from their property can obtain depreciation.
Claiming building structure as a deduction
Capital works allowance deductions are based on the historical cost of the building excluding the cost of all ‘plant’ and non-eligible items. As a general rule any residential building that commenced construction after the 15th September 1987 and any commercial property that commenced construction after 20th July 1982, are eligible for the capital works allowance.
Common depreciable items in an investment property
Plant and equipment items, commonly known as removable assets, are also eligible for depreciation tax deductions. Each plant and equipment item has an effective life set by the Australian Taxation Office. The depreciation deduction available on each item is calculated using the effective life method. Some plant and equipment depreciable items commonly found within a property include:
- Hot water systems
- Ceiling fans
- Blinds and curtains
- Exhaust fans
- Light shades
- Range hoods
- Smoke alarms
- Garbage bins
- Cook tops
- Door closer
- Investors can adjust their last two tax returns to claim missing deductions from the ATO
- An investment property does not have to be new – older properties also have valuable depreciation potential
- By claiming property depreciation on an income producing building, the client will pay less tax
Obtaining a depreciation schedule that maximises deductions may result in an investment property returning a positive income.
Quantity Surveyors are qualified under the tax legislation ruling TR97/25 to estimate construction costs for depreciation purposes and are one of select few professionals who specialise in providing depreciation schedules.
Also, the fee is 100 per cent tax deductible.