Tax allowance has the potential of making investment property profitable and depreciation has emerged as a key allowance. Depreciation residential rental property is a vital tax allowance that you must not forget to claim. Depreciation is a crucial element of a property investor’s investment strategy. It is important to note that depreciation tax breaks remain higher on new properties. However, they are available for all kinds of investment properties whether they are old or new. A large number of investors end up missing out on important tax breaks every year.
Here is how depreciation will work for a new investment property:
What is depreciation?
According to the Australian Tax Office, depreciation can be described as when assets decline in value as they age. It can be described with an example. Let us take an instance of a $2000 desktop computer on which ATO allows four years. It will provide you a $500 deduction every year over a period of four years. You should be aware of how and when to lodge your Australian tax return.
How property investors will claim depreciation?
Property investors will be able to claim for depreciation in two ways namely capital works deductions and depreciating assets. Here is how it can be further described:
- Capital works deductions: It is defined as the expense of building an investment property or construction expenditure. This form of depreciation normally spreads for more than 40 years. In other words, it is the duration that ATO claims that a building will last before it will require replacement. For example, if $2000 spent on building a new property, you may make a $5000 tax claim every year for 40 years (2.5 % per year).
- Depreciating assets: According to ATO, depreciating assets will include items like electric equipment, computers, furniture, and motor vehicle, among others. For property investors, the depreciating assets will include items like stoves, light fittings, carpets, or even the rubbish bin. ATO has specified all the items that you will be able to claim and for how long when you prepare your property report. It is also known as the effective life by ATO according to which this is how long the assets will last before it will need replacement. For instance, a carpet’s estimated lifespan will be 10 years, the kitchen stove’s life will be 12 years, and the bin’s life will be 10 years.
How you may claim depreciation?
You will be able to claim depreciation using two methods namely the prime cost method and diminishing value method. The prime cost method provides you an equal tax deduction every year over the item’s effective life. Meanwhile, the diminishing value method will offer you bigger claims in the initial years of the item’s effective and smaller claims gradually. A large number of investors opt for the diminishing value method as it provides them with a higher depreciation rate in the beginning. If you face some confusion, your accountant will give you advice as to which method will work best for you.
The aforementioned details will give you an adequate idea of how depreciation will work for a new property. It is ideal to hire an expert quantity surveyor who will be able to prepare your tax depreciation schedules in an effective manner. They have expertise in identifying the value of construction work. They can also offer you a report on the depreciation rate that will be claimable on your property and when you may claim it. You will then send this report to your account who will claim it on your tax return.