How far back can you claim depreciation? This has to be one of the most frequently asked questions we get.
Many property investors hold onto their investment properties for years without realising the potential tax benefits they can claim through depreciation. It’s only when they finally discover this deduction that they realise the extent of the financial savings to be had.
Another big surprise for many investors is that they can adjust their claims for some of their missed years.
If you’re one of these investors, before you get too excited, there are rules around how far back you are able to claim.
In this article, we’ll dive into the specifics of property depreciation and how investors can take advantage of it to claim missed tax deductions. We’ll also cover the rules around backdating claims so that you can ensure you are not missing out on any potential savings.
Understanding How Investment Property Depreciation Works
Before we dive into the details of backdating depreciation claims, you need to understand how property tax depreciation works.
Depreciation is the gradual decline in the value of an asset over time due to its natural wear and tear. In the case of investment properties, investors can claim depreciation as a tax deduction since it represents a “loss” for tax purposes.
You can claim two types of depreciation: capital works depreciation and plant and equipment depreciation.
Capital works depreciation refers to the decline in the value of the building’s structure, such as walls, floors, roofs, and plumbing. Depreciation on plant and equipment assets refers to the loss of value of the property’s removable assets, such as appliances, carpets, and air conditioning units.
The Australian Taxation Office (ATO) provides guidelines for how much investors can claim for depreciation each year, which can vary depending on the property’s age and assets.
Can You Back Claim a Missed Tax Deduction for Depreciation?
It’s a common misconception among property investors that if they’ve missed claiming depreciation in previous years, they can’t go back and claim it.
This isn’t entirely true.
The good news is that property investors can adjust their depreciation claims for previous years that they’ve missed.
How Far Back Can You Claim Your Missed Deductions?
While property investors can adjust their missed depreciation claims, you should note that there are limits to how far back you can claim.
The ATO allows individuals to amend up to two previous tax returns to claim missed depreciation deductions, which means that if you’ve owned an investment property for 20 years and have never claimed depreciation, you can’t go back and claim deductions for all those years.
To give you an example of how the two-year limit on adjust depreciation claims works, let’s say you purchased a residential investment property in July 2019 but just realised you could claim depreciation deductions now. As a result, you’ve already lodged your tax return for the 2019-2020 financial year without claiming depreciation deductions.
Under the ATO’s rules, you can amend your 2019-2020 tax return to include the missed depreciation deductions, as it falls within the two-year limit. You can also claim depreciation deductions in your current tax return for the 2020-2021 financial year.
However, if you also missed claiming depreciation deductions in the 2018-2019 financial year, you can’t go back and claim those deductions now, as it falls outside the two-year limit.
How Do You Back-Date Your Depreciation Claim?
To back-date your depreciation claim, the first step is to get in touch with a Quantity Surveyor who can create a property depreciation schedule for your investment property. A depreciation schedule is a report outlining all the depreciable property assets and their estimated value over time.
Once you have a tax depreciation schedule for your rental property, your accountant can request the ATO to amend your previous tax returns to include the missed depreciation deductions. You must attach the depreciation schedule to the request as evidence to support your claim.
You won’t have to pay any fees to the ATO for this process, and you generally won’t need to submit a new tax return unless the ATO specifically requests it.
The ATO will review your request and amend your tax return if they find you’re eligible to claim tax deductions for your backdated depreciation.
This process can take some time, so it’s essential to be patient and follow up with your accountant if needed.
How Much Can You Save By Claiming Back Missed Depreciation?
The amount you can save by claiming back missed depreciation depends on several factors, such as the age and value of your property and the amount of missed depreciation deductions. However, it’s not uncommon for property investors to save thousands of dollars by backdating their depreciation claims.
Let’s take a look at a case study example.
John purchased an investment property in Melbourne in 2019 for $675,000. He had no idea he could claim depreciation deductions and never bothered to investigate. John’s accountant filed his tax returns each year but never claimed any depreciation deductions.
In 2022, John’s friend told him about the benefits of claiming depreciation, and he engaged a Quantity Surveyor at Duo Tax to prepare a depreciation schedule for his property. Unfortunately, the Quantity Surveyor found that John had missed claiming $25,000 of depreciation deductions over the past two years.
John’s accountant submitted a request to the ATO for amendment of his previous tax returns to include the missed depreciation deductions, along with the depreciation schedule as evidence. The ATO approved the request, and John received a refund of $9,250 for the 2020-21 and 2021-22 tax years.
And now that he has a depreciation schedule, he can continue to claim deductions each year for the next 40 years, provided he continues to generate income from his property.
Key Takeaways
Claiming depreciation deductions is an excellent way for property investors to maximise their tax benefits and increase their returns on investment.
Unfortunately, many investors only realise the benefits of claiming depreciation several years after purchasing their property. The good news is that it’s possible to back-date missed depreciation claims and receive refunds from the ATO.
However, you must remember the ATO’s two-year limit on adjust claims and keep accurate records of your investment property expenses. With the help of a Quantity Surveyor and your accountant, you can identify missed depreciation deductions, backdate your claims, and save thousands of dollars.
If you’re a property investor who wants to maximise your tax benefits and minimise your taxable income, Duo Tax can help.
Our team of experienced Quantity Surveyors and tax accountants can provide a comprehensive depreciation schedule for your investment property, helping you identify missed deductions on depreciation assets and backdate your claims.
Contact us today to book a consultation and take the first step towards maximising your tax benefits.
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Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.
