A Beginners Guide to Rental Property Depreciation: All you should know!

In order to minimize your tax liability, claiming the depreciation on a rental property is imperative. It also significantly improves your cash flow. It is important to calculate precisely on the amount of depreciation tax deduction on rental property. While a little depreciation will enhance your tax liability, any excessive claim can cover you under the preview of ‘Fraud’.

Here is a comprehensive beginner’s guide to rental Property depreciation:

Depreciation – an Overview:

Depreciation technically refers to the decrease in the value of an asset over a period of time. Any tangible asset has a value which declines substantially over its useful life. The owner of the assets can deduct the cost of these tangible assets as an expense to claim the tax deduction.

Depreciation is a non-cash transaction which helps in improving the cash flows by the way of reducing the tax liability. Any rental property generates a certain amount of income which is liable to tax. By claiming the depreciation tax deduction on rental property, this liability can be reduced.

For investment property depreciation, there are two broad asset classifications:

  • Plant & Equipment: Any item used in a building including dishwashers, light fittings, curtains, carpets etc. But the garden plants are not covered in this category.
  • Building: The cost involved in the construction of the building for concrete or brickwork.

ATO Tax Depreciation Schedule – An Overview:

A Depreciation report needs to be maintained in order to claim a depreciation tax deduction on rental property. Tax depreciation reports state the entire claimable amount under depreciation to be considered for tax purposes. ATO only allows for a backdate depreciation of up to 2 years.

Hence, it is recommended to start claiming depreciation at the earliest possible time. It is worth noting that this 2-year limit can be contented by a savvy accountant and on the discretion of an ATO commissioner.

To include the rental depreciation:

  • Rental money must be included under the income.
  • Any insurance payout on the rental property must also be included under the rental income
  • Any booking or letting fee should also be considered as rental income.
  • Any reimbursement received for deductible expenditure to be included under the rental income.
  • In the case of co-tenants, depreciation can be claimed only to the extent of legal interest in the property.

Things to Know About Depreciation Tax Deduction on Rental Property:

In order to claim a correct depreciation tax deduction, you must know the following details:

Date of the Beginning of Construction:

When the construction of the property begins, the depreciation rate percentages can be counted from the effect. If the property is constructed in different time frames, the depreciation can be claimed according to different times.

The percentage of depreciation approves the time for which depreciation can be claimed. Say, if you are claiming a depreciation of 5%, you can claim it for the subsequent 20 years. Similarly, if you claim depreciation for 4%, you can claim it for 25 years.

Date of the End of Construction:

The depreciation tax deduction on rental property can be claimed after considering the date of the end of depreciation. This is a very important date to be known and considered for the depreciation deduction.

Cost of Construction Involved:

The actual cost of construction exclusive of the cost of property purchased as well as the value of the property is considered as the cost of construction liable for a rental property tax deduction. It can also be estimated, in case the owner is not sure about such cost. Such estimation can be done on the basis of the type of construction say residential house or apartment or any commercial property as well as the party involved in such construction i.e. owner, builder or any developer.

With this beginners guide to rental property depreciation, you can suitably save a considerable amount on your tax liability.

How Depreciation Works for a New Investment Property

The value of everything diminishes over time. This holds true for everything you buy or own. So if you buy a television, then its value will diminish by a certain amount or percentage every year. This is called depreciation. The extent of depreciation depends on the expected life of the television. So if you bought it for $800 and you expect it to function for 4 years, then each year the depreciation is $200. When it comes to buying, owning, and selling real estate, the principle of depreciation works in the same way. The process for claiming depreciation on investment property must be clearly understood to ensure that unnecessary tax is not paid. The tax depreciation investment property rules are different for old (already existing) property and new property. Let us examine the various aspects of depreciation on a new investment property.

Types of Tax Depreciation Investment Property

Depending on which part of the property is being assessed, there could be two categories of assets for which depreciation can be claimed, as per the guidelines of the investment property depreciation schedule ATO. The first is the capital works assets. This refers to the actual structure which is immovable in nature. It includes the cost of the walls and roof of the house as well. These assets are expected to last for much longer. For example, the depreciation of a building is expected to take place over a period of 40 years, so each year the depreciation would be only 2.5%. The second category is referred to as the plant and machinery assets. These are other assets which are added on to the house, and which have much shorter life spans. For example, the curtains, air conditioners, computers etc. would all be calculated as plant and machinery assets. For the calculation of tax depreciation investment property, the ATO has made a detailed list of expected lifespans of all the possible assets in a house.

Ways of calculating depreciation

There are usually two ways in which depreciation can be calculated. We already discussed how depreciation means the gradual reduction of the value of an asset over its service life till it becomes zero. The two ways of calculating depreciation assume different velocities of this reduction of value. The prime cost method assumes that the depreciation takes place in equal amounts every year. On the other hand, the diminishing value method assumes that the drop in value is greater in the first few years and then flattens out.

How to Create a Depreciation Schedule

We have already discussed the two types of assets for calculating depreciation. We also saw the two different ways of calculating depreciation. But beyond these two things, there are other factors that need to be taken into account for calculating a depreciation schedule. Based on this depreciation schedule, the tax write-offs and allowances would be calculated by the ATO. That is why it is very important that the depreciation schedule is perfectly created so that you do not lose out on any allowable deductions, nor do you end up paying extra tax. That is why it is important that you use the services of a good tax consulting agency. A good agency would have your property evaluated by a qualified quantity surveyor, who would list down every small and big asset on your property. Based on the report provided, your tax returns can be accurately filed.

The rules governing existing and new investment properties in Australia are different. If you want to get the best benefits from your tax depreciation investment property, you need to use the services of a dependable tax consulting agency.

What Is a Rental Property Depreciation Schedule?

When you own investment property or rental property, the value decreases every year due to depreciation. But you can also claim tax allowances on the depreciated amounts every year. A rental property depreciation schedule can help you understand the amounts you are eligible to claim on your tax returns every year.

ATO Compliant Depreciation

The Australian Tax Office (ATO) fixes the rates of depreciation applicable for rental and investment property. The rental home returns need to be filed in accordance to these ATO depreciation rates and must be compliant with other ATO guidelines as well. Only an ATO compliant rental property depreciation schedule should be used for filing tax returns. There have been some changes to the tax and depreciation rules in 2017, and the property owner should be aware of what depreciation allowance is permissible on each of the assets on the property. The rules for Capital Works depreciation and Plant and Equipment depreciation as laid down by ATO should be followed.

Get Rental Property Depreciation Schedule from Experts

You can easily make your tax returns compliant by using the services of a reputable and trustworthy company. A Deppro depreciation schedule would be created with the help of registered and knowledgeable quantity surveyors. Each element of your property would be divided into the correct categories and depreciation rates applied accordingly. The quantity surveyor would take accurate measurements of all the construction elements and other assets of the property. Based on those numbers, the annual depreciation would be calculated. A cumulative calculation of subsequent years should also be provided.

If you wish to file accurate tax returns and not miss out on any allowances you are eligible for, you need to first get a rental property depreciation schedule prepared with the help of a registered quantity surveyor.

Depreciate Your Property Taxes with Tax Depreciation Services

The value of your property does go down every year. While that is something you might not be particularly chuffed about, you can rejoice in the fact that claiming depreciation on property is the perfect opportunity to recover your losses. This can be done is by setting off those depreciated amounts from the property tax you are supposed to pay.

How to Assess Property Depreciation?

The tax benefits we spoke about at the start would be granted as per the numbers provided by a formal property tax depreciation schedule. This is done by employing the services of a qualified and certified quantity surveyor. The surveyor would visit your property in person and take all necessary measurements of the assets on your property.

Using Property Depreciation for Claiming Depreciation on Property

The quantity surveyor’s report would be part of the overall property depreciation reports. These reports would help in preparing the tax return in such a way that would allow for claiming depreciation on your property. Every asset on the property is usually of two types – it is either a capital works or plant and equipment. Depending on the type, there are different depreciation rates laid down by the ATO.

Conclusion

Do not let your property tax be a burden on you. The depreciation of different elements of your property can easily be used to set off those losses against tax deductions that could reduce your total tax outlay. The property tax could be substantially reduced by claiming depreciation on property. A good agency with certified quantity surveyors like Deppro can help prepare the depreciation report and then use it to prepare the correct tax return which will include the maximum entitlements.

Tax Depreciation for Investment Properties

Most investors are aware that their property’s value will only decrease over time. But many investors are not aware of the benefits of this depreciation on investment property. Depreciation can help an investor claim tax benefits. The loss due to depreciation would be partly offset by the tax allowances claimed. A typical rental or investment property would have several components. Some would be fixed and part of the property. Some would be attached or constructed additionally. A property depreciation schedule would enable the right tax breaks to be computed. Let us see how an owner can take the help of companies like Deppro Perth to do this.

The Need for an Accurate Schedule

Different depreciation rates apply to different components of a property. As per Australian tax rules, each type of attracts different tax allowances – a property owner might not have complete knowledge of this. It is also time-consuming and tedious. That is why property owners often entrust the job to competent agencies. This ensures that the tax breaks are accurately claimed.

Calculation of Depreciation on Investment Property

A good agency would have competent Deppro quantity surveyors. These surveyors assess every small and big asset included on the property. This is done in strict accordance with ATO guidelines. The rules laid down by ATO often undergo revisions: Deppro quantity surveyors are always completely up to date with such changes. Therefore, you are guaranteed an accurate calculation of your depreciation with Deppro surveyers. Once depreciation is accurately calculated, the right tax deductions can be claimed.

Investors can easily claim the benefits of depreciation on investment property; these benefits accrue through allowable tax deductions. A well-trained and knowledgeable quantity surveyor from a reputable company can help claim the maximum tax benefits. This also ensures that tax benefits allowed by law are not missed.

property market

How Real Estate Investors Can Benefit From a Property Depreciation Schedule

Real estate is a great investment avenue. But property investors have to deal with depreciation. Every year the value of their property reduces. This is called depreciation. The rate of depreciation that each component of your property is eligible for is different. It depends on the ATO (Australian Tax Office) regulations. The Australian tax depreciation rules clearly specify the different rates. Accordingly, the tax deductions can be calculated and claimed. But for that, a complete schedule of depreciation calculations for every year needs to be created. That is called a depreciation schedule.

Process for Creating Depreciation Schedule

The first step of the process, is to get in touch with a dependable agency. This will help you save both time and effort. They will send you a qualified quantity surveyor of which will list down every single asset on your property. Then those assets are categorized as per the ATO rules. The depreciation schedule is then created with such details. A reputable agency will make the process of claiming depreciation on investment property very easy and convenient.

The Tax Benefits

Once the depreciation schedule is ready, it provides the corresponding tax breaks that are permitted by law. If the schedule has been correctly made, then the tax return will also be accurate. Therefore, there is no chance of double tax getting paid for the same item. Not to mention, you would not miss out on any taxable items. But most importantly, no eligible tax deduction option would get left out. Therefore, you can be assured that the lowest possible tax is paid.

A properly-made depreciation schedule is very important for investors. Otherwise, they can end up losing a part of their profits needlessly. Investors should have an accurate view of the tax savings they are eligible for, and such a schedule can help them.

Do You Need to Make Estimated Tax Payments?

You might be planning to pay advance tax or it might be time for the last tax submission date. Whatever your situation, it is always useful to estimate tax returns in advance, to ensure you plan your finances carefully. Tax returns can have several aspects, depending on your profession and your source of income. So keeping some time in hand is a good idea. Not to mention, you may be eligible for tax refunds from earlier years, so you should take that into account in your tax estimate as well.

Impact of Property on Tax Returns

If you are the owner of a rental or investment property, it will impact your tax liabilities. Every property attracts depreciation as per ATO rules. However, there is an upside, as property depreciation makes you eligible for tax allowances. This reduces your tax when you file your tax return Australia. But to ensure you get this reduce in tax, it is crucial your depreciation schedule has been made properly. This helps calculate the correct tax breaks you are eligible for. However, the current applicable laws must be considered when making the schedule. This will ensure that the property owner doesn’t pay double tax and assist with claiming the maximum deductions possible.

How to Estimate Tax Returns with Correct Depreciation

To estimate Tax Returns with the accurate depreciation, a property and all of its assets must be correctly assessed. This is where a reputable company like Deppro can help. They have qualified expert quantity surveyors on their rolls; they can help you to make the most accurate property depreciation schedule. Firstly, the surveyors make several field visits to take accurate measurements. This is then used to quantify each asset’s depreciation for each year.

When you wish to estimate tax returns, you need to take depreciation and refunds into account. Reputable companies with skilled staff can help you do these calculations. Instead of wasting your own valuable time, these companies do it all for you!

Commercial property renovation hacks that add value

As an investor, you want to be up-to-date with market trends and find ways to bring in tenants to your commercial properties. If they’ve sat bare for a couple of years, and looking dates, then it’s time to get renovating. We have a couple of hacks so you can focus on the right areas, where you can make the most money off your depreciation schedule.

Bathrooms

Not just any type of bathroom with a few toilet stalls and basins; looks definitely matter. Offices, shops and restaurants are becoming fancier with their designs. Even gyms have bathrooms worthy of an interior design featurette.

A gym shower and sauna in the USA

Bathrooms are major selling points for tenants in both residential and commercial property. Natural wood elements and lighting paired with neutral tiles is a common combination that never fails to impress. If you own an office block and have the room, fully equipped bathrooms are an excellent selling point. Workers often hit the gym before they make their way to the office. They’ll need a place to freshen up before the day ‘officially begins’.

Kids play area

Employees have families, as do potential visitors. And not everyone can bring in a babysitter or find a daycare. Having am on-site kids play area in a commercial property isn’t that unusual. Shopping centres have done it before, and the trend is slowly spreading to gyms and workplaces.

Kitchenette

Definitely a feature that will attract tenants. They need a place to keep their food, make their coffee and take a break from their desks. The kitchen is where you can make money in terms of the plant and equipment items in place there. This includes the dishwasher, espresso machine, microwave, sink and fittings.

Outdoor entertaining

Humans need sunlight and fresh air; what better way to access it at work than an outdoor area? When you’re renovating the property/making an extension, turn the extension into a patio with some hedges, a barbecue and some outdoor furniture. The barbecue and the furniture can be depreciated.

TVs

Yes, we are giving you an excuse to go out and buy some big screen televisions. Modern properties have a showreel on their TV screens, usually placed in the foyer and meeting rooms.

Get more free advice below;

Read this to increase the value of your commercial investment property

Residential properties that guarantee an ROI

Depreciation And Real Estate Mistakes That Will Lose You Money

Mistakes are part of life, but you’ll be kicking yourself if they lose you money. Make sure you avoid the ones below.

Rent at mates rates

It’s natural to want to help your mates out; it’s what friends do. But there are some situations where mates rates should not apply, and that includes property. The reason investors get into the property market is because they want to make an income. Friends can certainly live in properties you own, but be firm when you say they must pay rent. You’re running a business, not a charity.

Don’t mix business with mates; you can’t be a friend and a land lord

Depreciation DIY

Don’t attempt this unless you’re a quantity surveyor. These people work out costings for building projects and have a high level of education. They’re part of an official body (Australian Institution of Quantity Surveyors) that ensures members are aware of the latest industry standards and participate in the training required to keep up their skillset.

Long story short; unless you have a Bachelor of Urban Development (Honours) (Quantity Surveying and Cost Engineering), leave it to the experts. Book an appointment here to get a qualified surveyor in for a visit.

Saying ‘that’s not worth anything’

Just because some of the properties have a few decades on them doesn’t mean they aren’t worthless. Some capital works are still eligible for deductions.

Items that are worth $300 or less are eligible for immediate deduction; think the rubbish bins, smoke alarms, children’s play equipment and the curtains. Other overlooked deductions include spa baths, bathroom and kitchen appliances and even the swimming pool are items that can be claimed on a tax depreciation schedule.

Old doesn’t equal worthess

Putting it in the wrong category

Yes, this is one of the dangers of DIY depreciation. In the schedules that quantity surveyors create, there’s two categories; capital works and plant and equipment. They’re also known as Divisions 43 and 40, respectively.

Capital works include items that are built into the property itself; wiring, driveways, fences and some landscaping. Plant and equipment include things you can easily remove from the property such as furniture and carpeting. If you own a commercial property the desks, blinds and shelves can be claimed. You can find out more about deductions on the ATO website.

Get more free advice here;

Behave like a 1% property investor with these tips

Common Errors Property Investors Should Avoid

Property Sector Warned About ATO Crackdown On Tax Depreciation Claims

Over recent years, the ATO has paid growing attention to tax returns submitted by tax payers relating to investment properties.

It is therefore highly likely that the Australian Taxation Office will pay particular attention to tax depreciation reports for investment properties when property investors submit their tax return from 1 July.

In particular, they may pay particular attention to tax depreciation reports that are prepared without a physical inspection of the property.

Unfortunately, a growing number of tax deprecation companies are not undertaking physical inspection of properties to cut costs and this failure could result in serious problems for their clients if they are audited.

If you are a property investor and plan to visit your tax accountant regarding your tax return from 1 July, you should raise the issue of tax depreciation and obtaining an ATO compliant tax depreciation schedule for your property or properties.

It is important to raise with your accountant the fact that desktop estimates of potential tax depreciation benefits are not accepted by the ATO and that a physical inspection of the property is required.

Accountants need to protect the interests of their clients by ensuring that the tax deprecation company they recommend to their client, conducts a physical inspection of the property.

The same principle applies to other professionals related to the property sector such as mortgage brokers who refer their clients to a tax deprecation company. Similarly, they should check if the tax deprecation company undertakes a physical inspection of the investment property before making a referral.

This is a simple check but one which could ensure that their client does not have to pay substantial penalty fees imposed by the ATO because the tax deprecation report is not compliant.

Overall, it is still unfortunate fact that a large number of tax payers who own investment properties will collectively miss out on millions of dollars in tax depreciation benefits over the coming weeks simply because they do not correctly claim them through lack of knowledge.

DEPPRO estimates that only one in five residential investors make use of the tax depreciation entitlements which are available to all investors on all investment properties.

Many property investors who have owned their properties for several years and have not undertaken a tax depreciation schedule still have the potential to claim back thousands of dollars in tax depreciation benefits.

A depreciation schedule can be undertaken at any time by a property investor. If you own a property for a number of years, you can still undertake a depreciation schedule and put in an adjusted tax return to enable them to obtain unclaimed tax depreciation benefits.

Most investors do not realize that tax benefits obtained through depreciation can be equivalent to 60% of the total purchase price of the property.

For a new apartment in a capital city, for example, this can equate to over $300,000 in possible tax benefits through depreciation.

You should engage the services of a tax deprecation company who will undertake an inspection of your property and provide you with an ATO compliant tax depreciation report which you can provide to your accountant.

This report is a ‘once off’ and will outline the amount of tax benefits you can claim on an annual basis. Anyone considering employing a tax depreciation company should ensure that they are a member of the Australian Institute of Quantity Surveyors (AIQS).

Obtaining a tax depreciation schedule that is compliant with ATO guidelines is a small investment that can deliver a huge financial return and boost cash flows during a time when rents throughout Australia are under downward pressure.