As a property investor, it’s essential to be aware of all the different tools at your disposal to help maximise your returns. From leveraging equity as a means of growing your portfolio to taking advantage of negative gearing for a lower taxable income, there are many ways you can boost your returns.
One often under-utilised tool in the investor’s toolkit is depreciation.
Depreciation is a non-cash deduction that allows you to claim a portion of the cost of your property over its useful life. To claim depreciation, you need to order a depreciation schedule from a quantity surveyor.
In this blog post, we’ll explain everything you need to know about depreciation schedules, from what they are and how they work, to why they’re such an important resource for property investors.
What is Depreciation?
Put simply, depreciation is the decrease in an asset’s value over time due to natural wear and tear. Property depreciation can provide a significant tax benefit for investors, as the Australian Taxation Office (ATO) effectively allows you to offset the cost of this wear and tear against rental income.
What sets a depreciation claim apart from other rental expense tax deductions for your investment property is that it is a non-cash deduction – you don’t have to spend any money to claim it.
There are two main types of property depreciation: capital works deductions (Division 43) and plant and equipment (Division 40) deductions. Investors can claim a capital works deduction for the building itself, as well as plant and equipment depreciation deductions for assets within the building, such as furniture, fittings, and appliances.
The structural component of a building usually depreciates at a fixed rate over a long period of time—usually 40 years. In contrast, plant and equipment assets depreciate according to their effective lives as they generally wear down faster than the building itself.
VIDEO: All you need to know about property tax depreciation
What is a Tax Depreciation Schedule?
A tax depreciation schedule provides a breakdown of the depreciation deductions you can claim for an investment property and eligible plant and equipment assets. It includes the original value, the estimated effective life, and the depreciation rate for both the structural components and the plant and equipment assets.
How Can You Get Your Hands on an Investment Property Tax Depreciation Schedule?
If you’re looking to get your hands on a tax depreciation schedule, the best way is to get in touch with a quantity surveyor.
A quantity surveyor will estimate construction costs, project management, and construction consulting services. They work on various commercial, residential, and industrial projects.
In Australia, however, quantity surveyors are also qualified to draw up a depreciation schedule because of their ability to estimate property costs, including historical costs.
To complete the report, they’ll undertake a detailed evaluation of your property and draw up a schedule you can submit to your accountant as part of your tax return.
The schedule is valid for up to 40 years, which means you can claim tax deductions each year with the same report, and even the quantity surveyor fees are tax deductible.
How Do Quantity Surveyors Calculate Your Depreciation Deductions?
There are two ways to calculate depreciation deductions for your investment property: the prime cost method and the diminishing value method.
The prime cost method calculates the decrease in value of an asset over its effective life at a fixed rate each year. The diminishing value method results in a higher depreciation deduction in the first few years of property ownership, as it considers an asset’s diminishing value as it ages.
Ultimately, the choice of which method to use will come down to factors such as:
- How long you’re planning to hold onto the property
- Your tax situation
You might be interested in reading: Prime Cost vs. Diminishing Value Depreciation Method – Which is Better?
What Do Tax Depreciation Schedules Look Like?
You can expect a detailed depreciation schedule to contain the following elements:
- Glossary: ATO jargon can be tricky to grasp, so a good depreciation schedule will contain a glossary of terms to help you understand exactly what you’re reading.
- Breakdown of your capital works deductions: You should be able to see how much the structural components of your property have already depreciated and how much it will continue to depreciate.
- The effective life of eligible plant and equipment assets: The depreciation schedule should provide you with an itemised list of all eligible plant and equipment assets on which you can claim a deduction, as well as its prescribed effective life (i.e., how long you can use the item).
- Both calculation methods: You should be able to see how much depreciation you can claim according to both methods so that you can decide what you prefer.
- Low-value pool assets: If you have assets with a value less than $1,000, you can add them to a low-value pool, which allows you to claim deductions for the pool at a set annual rate.
If you would like to see the exact breakdown, you can request a tax depreciation report sample from Duo Tax.
Why Choose Duo Tax?
Duo Tax is a quantity surveying firm specialising in producing tax depreciation schedules for investors and business owners. We understand the importance of getting this process right, as it can result in significant savings on tax. Our mission is to provide an efficient, cost-effective, and quality service that delivers real value to our clients.
A depreciation schedule is a powerful tool that every Australian property investor should utilise. If you’re thinking about investing in property, be sure to speak to a professional quantity surveyor about getting a depreciation schedule for your investment property.
To order your Duo Tax investment property depreciation schedule, follow these four simple steps:
- Use our FREE rental property depreciation calculator to estimate how much depreciation you can claim
- Get in touch with us today to see if your property is eligible
- Order a depreciation schedule over the phone or via our online form, and we will begin preparing your report
- We’ll deliver your tax depreciation schedule to you and your accountant within 5 to 10 days.
It’s as easy as that—don’t miss out on an opportunity to potentially save thousands of dollars in tax!