August 17, 2015
Many people are unaware that they are failing to maximise their tax deductions in relation to rental properties and therefore also failing to maximise their rental property returns. If you have a rental property is always an opportune time to check one such deduction – Depreciation.
A depreciation/capital works deduction is basically the claim for wear and tear on the building and fixtures and fittings within it. Depreciation can be claimed on both residential and commercial properties. The depreciation benefits available will depend on the type of building, its age and fit out.
Depreciation is not only claimable on new items you purchase for the property, but also on the building, fixtures and fittings existing at the time you purchased the property. A quantity surveyor can inspect the property and provide the landlord with a report outlining the all claims available. Such a report will satisfy the Australian Taxation Office (ATO) substantiation requirements.
In order to maximise deductions available and therefore the rental property returns, it is better to obtain the report in the year the property was purchased. The report is not required every year, it specifies deductions for depreciation available for the property for up to the next 40 years. If you have an existing property and don’t have a Quantity Surveyor’s all is not lost. The report can be obtained at any time although the deductions you have missed out on in prior years may be lost.
Generally, properties constructed and or renovated/refurbished after 18 July 1985 (residential) and 20 July 1982 (commercial) will be eligible for capital works deduction (depreciation on the building). In addition, capital works deduction can be claimed on any structural works after February 1992. For example fencing, paving, pergolas and garden sheds.
For an older property, if you are thinking of undertaking any renovations or additions, a Quantity Surveyors report will allow any existing items to be written off in the year of renovation. This can substantially increase your tax deductions against your rental property income. In addition, depreciation will be allowed on the new works undertaken.
As mentioned, the depreciation benefit obtainable depends greatly on the type of building, its age, use and fitout. As an example, a residential house costing $375,000 can have depreciation in the first year of $8,000, with cumulative depreciation of $40,000 over 5 years. An office building costing $1 million, may have a first year depreciation of $65,000, and a cumulative depreciation of $300,000 over 5 years.
In addition, the fees paid to the Quantity Surveyor are tax deductible and are generally (depending upon the age of the property) more than recouped within the first years depreciation claim. By failing to maximise tax deductions and rental property returns you are failing to get the best from your investment.
If you need advice on taxation and rental properties or would like a recommendation for a Quantity Surveyor contact us at Riverwood Group to help you get your investment on the right track.
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