The green revolution has been underway for a while now, as individuals and businesses embrace methods that respect and protect the environment.
If you’re a property investor looking to be more conscious of your impact on the planet, building or retrofitting your home to be eco-friendly is a great option. Not only does it help reduce resource consumption and waste production in your daily life, but it also has long-term benefits like lower energy costs and better indoor air quality.
Plus, you’ll feel good knowing that you’re helping to create a cleaner planet for future generations by making sustainable choices in your own life.
But there’s one more thing you may not have thought about the investment property tax benefits.
When you already need to contend with unavoidable expenses, such as land tax, council rates, body corporate fees or property agent fees, it pays to know every way possible to claim tax deductions. For example, if you own an energy-efficient home, the Australian Taxation Office (ATO) will reward you by helping you reduce your overall taxable income.
Understanding Investment Property Tax Deductions and Depreciation
In Australia, there are a range of rental expenses incurred that you can deduct against your rental income received come tax time, including:
- Advertising costs
- Strata fees
- Bank fees
- Loan interest payments
- Lenders mortgage insurance
- Maintenance costs
- Borrowing costs
- Property management fees
What’s more, property investors can claim tax depreciation on the buildings and fittings of their investment properties. This allows them to reduce the income tax they owe on their rental income by considering the wear and tear of these assets over time.
You can claim two types of deductions:
- Capital works: these deductions relate to the depreciation of the building itself. It also includes construction costs or renovation work done on the investment property and the installation of a new roof or retaining wall.
- Plant and equipment: these are deductions claimable on items you can easily remove from an investment property and have a shorter useful life, such as smoke alarms and air-conditioning units. These assets generally offer higher levels of property depreciation than the building itself because they are more quickly subject to wear and tear. As such, investors can claim a more immediate tax depreciation, often within the first five years.
Making eco-friendly improvements to your investment property can reduce your tax burden by taking advantage of cost write-offs and depreciation. For example, if you install energy-efficient appliances or make other improvements to your property that qualify as energy-saving measures, you may be able to write off a portion of the cost of these improvements on your tax return.
4 Eco-Friendly Rental Property Upgrades and Their Depreciation Benefits
Here are four strategies property investors can use to benefit both the environment and their cash flow.
1. Implement More Energy Efficient Heating and Cooling Systems
Heating and cooling systems are major contributors to carbon emissions in residential & rental properties. One way to reduce your environmental impact is to invest in insulation for your walls and roof cavities, which the ATO will allow you to claim as a capital works tax deduction.
Double-glazed window panels can also help to regulate the temperature in your home and are depreciable as a capital works deduction on your tax return.
And lastly, consider adding some ceiling fans to increase ventilation and airflow throughout your investment property, which will make a noticeable difference in summer. Ceiling fans are the more cost-effective choice than air conditioners, and if they cost you less than $300 each (which is most often the case), the full cost is immediately a tax-deductible expense for that financial year.
2. Consider Installing Solar Panels
If you believe that having an air-conditioning unit will boost interest in your rental property and you’re not quite ready to replace it with a ceiling fan, you might want to think about installing solar panels to help power it.
While solar panels may not significantly increase the value of your investment property, they can give it an advantage over others that do not have them. This is because solar panels are known to provide cost savings and environmental benefits, making them attractive to potential buyers or renters.
And there’s the added benefit of depreciation benefits.
Solar panels fall under the plant and equipment asset category, which means they have an effective life of 20 years. Property owners can depreciate its cost by 10% annually if they opt for the diminishing value method.
In most states, the local government also offers certain rebates for purchasing a solar system, so find out if you can benefit from further savings.
Add a Water Tank to Save Water
Another eco-friendly addition to your rental property is installing a rainwater tank that your tenants can use for various purposes, such as irrigation, flushing toilets, and washing clothes.
Water tanks are also popular among tenants in Australia because they can help reduce household expenses. Water is often a significant portion of a household’s utility bills, but using rainwater from a water tank can reduce the amount of water purchased from the local council. This can help lower the overall cost of living and make a property more attractive to potential renters.
You can generally purchase, install and plumb a water tank for less than $5,000. And because it’s a plant and equipment, it has an effective life of 5 years, meaning you can benefit from a 40% depreciation deduction each year.
Enhance Your Garage with an Electric Car Charger
Installing an electric car charger in your garage can be a convenient and eco-friendly way to power your electric vehicle, and especially appealing to tenants in the inner city who own electric cars, such as Teslas.
With an electric car charger in their garage, these tenants can charge their EVs at home, saving them time and money that they would otherwise spend on public charging stations or gasoline.
With an effective life of 10 years, you can claim depreciation at 20% each year.
Why You Should Contact a Quantity Surveyor When Going Green
If you’re thinking about making one or more of these eco-friendly changes to your investment property, you should reach out to a qualified Quantity Surveyor to get an accurate estimate of your depreciation deductions.
A Quantity Surveyor is a professional who specialises in measuring, evaluating, and estimating the cost of construction and building projects. They can also help you determine the depreciable value of your investment property and prepare a tax depreciation schedule, which outlines the depreciation expense you can claim on your tax return.
If you don’t already have one, getting your hands on depreciation schedules will help you maximise your tax deductions far beyond just the eco-friendly upgrades on this list.
You can check out our case studies to see how much depreciation you could claim.
Alternatively, you can follow these simple steps to order a Duo Tax depreciation schedule:
- Use our FREE rental property depreciation calculator to estimate how much depreciation you can claim.
- Contact us today to get a quote and 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.
Overall, making eco-friendly upgrades to your property investment benefits the environment and can save money with less tax through depreciation deductions, helping you on your way to financial freedom. If you would like to learn more about all the tax breaks available, or if you have any questions about other tax deductions and need capital gains tax advice, contact one of our depreciation experts today.