Appreciating the benifits of tax depreciation come tax time

Don’t fall into the trap of missing out on thousands in tax savings each year because you are not fully maximising depreciation allowances on your investment property.

Depreciation is one of the most important (yet often overlooked) tax saving benefits available to investment property owners. Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.

There are two types of depreciation allowances: plant and equipment such as carpets, blinds and whitegoods, and, capital works items such as windows, brickwork and doors. Plant and Equipment items have varying rates of depreciation while capital works items are claimed at 2.5% per annum.

According to Tyron Hyde, tax depreciation expert with quantity surveying firm Washington Brown (washingtonbrown.com.au), many property investors unwittingly miss out on huge tax savings simply because they do not claim their full entitlements.

“One of the biggest myths circulating is that only new property can be depreciated,” said Hyde. “This is simply not true. Both new and old properties will attract some depreciation allowances. It is definitely worth it for all property investors to get a estimate for depreciation, they could be surprised at the large tip they’ve been giving the ATO each year.”

Hyde is quick to point out that if investors haven’t been claiming or maximising their full entitlements they can backdate previous tax returns.

“Property investors also need to be aware of the recent surge in do-it-yourself depreciation options available via the internet,” Hyde added.

“Only accredited quantity surveyors are trained in estimating building costs. It’s important to understand that a small incorrect measurement could end up costing you thousands in deductions.”

For example, DIY depreciation requires that you do your own measurements. If you measure one bedroom from one wall to the other and you do this around the house you actually reduce the property by 10% in gross area. At $1500 a square metre to build, you’ve just missed out on approximately $15,000 in deductions.  

“Not only are you running the risk of missing out on valuable deductions if you measure incorrectly, but submit an incomplete or poor quality depreciation report and you could attract an audit by the ATO,” said Hyde.

Other important facts about depreciation:

• Depreciation is the only deduction that can be subjective. All other expenses - such as interest, strata fees etc. must equal the amount you have precisely paid out.
• You can claim deductions on renovations but get a professional assessment from a quantity surveyor before you renovate so you can claim full entitlements.
  
• Depreciating your investment property can dramatically improve your bottom line.
  
• Use an online tax depreciation calculator to estimate which properties will give you the best return before you buy (washingtonbrown.com.au/calculators)
  
• Property tax depreciation reports are 100% tax deductible

“Depreciation isn’t about dodging taxes, it’s about getting every last cent of depreciation allowance that you are legally entitled to,” said Hyde.

What’s not to appreciate about that?

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