Investing in property is a smart way to maximize your cash flow and save for the future. However, navigating through the world of property investments can be overwhelming. There is a lot to learn when trying to grow your business. A property investor should know the different rental yield factors, be knowledgeable about tax breaks, and understand property depreciation. These are essential steps in building an investment property portfolio. Unfortunately, tax laws are not written to be understood easily. Therefore, the process of investing in property comes with a bit of a learning curve.
In this post, we feature beneficial property investment tips.
1. Find Out If You Qualify for Tax Depreciation
Property depreciation is an important factor for rental property investors. Generally, the tax depreciation allows investors to deduct the costs from the taxes of buying and improving a property over its useful life. The Rental Property Depreciation lowers the taxable income, increasing your rental income. In 2017, the Federal Budget introduced some changes that affect property investors. The new tax depreciation laws apply for the properties bought after May 9th, 2017 and touches the plant and equipment categories in residential homes. The government has introduced a limit on plant and equipment deductions.
Under the new regulations, property investors can claim tax depreciation if they meet the following requirements:
You signed the property purchase contract before May 9th, 2017.
The purchase of the new property was after May 9th, 2017.
You hired a property builder to build a new home for investment purposes, and the property remains in your portfolio.
The property is renovated, and you have installed new plant and equipment.
Note that you will not be able to claim depreciation on plant and equipment.
2. Hire a Professional to Prepare the Property Depreciation Report
To determine which items are depreciable, you should prepare the property depreciation report. The report must cover all the depreciable items to avoid losing your income. We suggest you hire the services of a professional to help you prepare the property depreciation report. Qualified property inspectors have the knowledge and experience to know which items are depreciable. Besides, experts understand the rate at which the items are depreciable, and they will advise you on how to get more savings.
3. Save through Capital Gains Tax Exemptions and Discount
The Capital Gains Tax (CGT) is the tax you pay on your property capital gain upon selling the investment. The CGT is part of your income tax, and it is not calculated as a separate tax. However, if you made a capital loss, you cannot claim it against your other income. However, you can declare the loss to reduce the capital gain. There are four legal ways to reduce the CGT on an investment property. These are:
Take advantage of being an owner-occupier if the property serves as your primary place of residence. That way, the property is exempted from CGT.
Wait for up to a year to receive a 50% tax discount on the gain you make on the property.
Get the property reassessed before renting it out.
Take advantage of exemptions like the six-year rule.
Using these tips, you can save on Capital Gains Tax.
4. Ensure Best Property Maintenance Practices
Property maintenance is the secret to ensuring your property is attractive to renters. The property must be put into some profitable use, like renting, to get the property depreciation. In that regard, it is helpful if you engage a professional property management company to manage your property. That way, your property remains attractive to the renters.
We have looked at some smart property investment tips. If you are planning to invest in properties, make sure you factor in these tips. For assistance with property depreciation, talk to DEPPRO. We are the leading property depreciation experts serving Australians. We provide reliable and professional services when it comes to the management of your property.
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Are you a small business owner who is struggling to save money? Did you know that you could save with property depreciation? Ideally, real estate depreciation on a rental property can lower your taxable income. Consider that annually the government deducts your assets depreciation amount from the assessable income to determine the taxable income. If you invest in properties, property depreciation allows you to deduct the property’s cost from the taxes required to buy and improve the property over its useful life. As such, tax depreciation enables property owners to lower the taxable income in the process.
What Type of Property is Depreciable?
Rental property owners use depreciation to deduct the purchase price and the cost of property improvement from the tax returns. However, it is worth noting that the depreciation happens as soon as the property is ready for use as a rental. Also, you can only depreciate the value of the building and not the value of the land. In that regard, you have to separate the value of land from the value of the depreciable property.
Rented properties can be a depreciation expense, as can the improvements made to the property. However, property maintenance does not count towards the annual depreciation, so you cannot write off regular maintenance.
Here are important factors to keep in mind when determining the rental property depreciation:
You must be the property owner. This is regardless of whether you borrowed a loan to purchase the property or you are still repaying the loan.
The property should be put into income-generating use and not be your primary residence.
The useful life of the property should be determinable.
The property should exist for more than 12 months.
Note that you will not qualify for the property depreciation if you got rid of the property in the same year you purchased it. In that regard, wholesaling and house flipping does not qualify for property depreciation.
Tips to Maximize Cash Flow Through Property Depreciation
A smart way of investing in property is not just about capital growth and high rental yields but also maximizing cash flows. One of the strategies through which property investors can maximize the cash flow is through tax depreciation. Tax depreciation is the only deduction that can be subjective. Here are some essential tax depreciation tips to help property investors.
Maximizing the Cost of Property Construction
When calculating the depreciation on a property, you must use the cost of constructing the property. Owing to the current economic status, many property buyers are buying buildings at reduced prices nearer the original cost of constructing the property. Therefore, the idea is making the most of the current market conditions and searching for properties where the actual construction cost is close to the current purchasing price.
Do Not Assume You Do Not Qualify to Depreciate the Property Based on Its Age
Even properties built in the 80s may qualify for tax depreciation. Talk to depreciation professionals near you to break down the different categories and qualifications. You may be surprised to find more than 40% of the items or equipment qualify as tax-deductible expenses.
Claim the Small Items and Low-Value Items
Experts advise that property owners deduct as many items as they can. Ifit falls under the set maximum value, you can write it off. Claiming all the items is a great asset pooling strategy for your business.
Use an Experienced Depreciation Professional
For first-time property owners, preparing the depreciation schedulecan be a nightmare. It helps if you engaged experienced professionals. The move will save you time and effort, so you can focus on growing your business. It is helpful you hire a company that has years of experience in calculating property depreciation.
Do not bother with DIY property depreciation. Contact DEPPRO for professional solutions. We have experienced experts who can ensure you earn maximum income through property depreciation. Call us today for an on-site consultation.
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Are you contemplating if building a new structure on your piece of land is the right choice? Going for this approach gives you many benefits as an investor. You get your own builder and do some research about what the trends in real estate are, what people are willing to pay for. You want to do everything right to ensure that investing in property would give you a higher ROI from the tenants you wish to attract. Your newly-built property should be perfect for your intended market.
What Is the Process of Building on an Investment Property?
It starts when you purchase a piece of land with the intent of building a house on it with a specific design in mind. In involves finding a builder who will work on a contract for a period of several months. Usually, the construction company oversees the building process, while a bank pays them for their work. Other people ensure the building structure is done to specifications, such as building inspectors, building certifiers, and bank value’s. You also need the Council approval of your plans.
Your builder will update you on the progress of the construction of your investment property. The entire process is easy and exciting, creating new opportunities to invest in other locations. A smart real estate investor acknowledges the importance of diversity in locations, which is also beneficial in the investment portfolio.
What Are the Benefits?
Here are four reasons why building your investment property can give you financial gains even though there are many other attractive houses for sale out there:
You have the opportunity to get instant equity. It means, after buying land and building a property, you may have it re-valued to your lender. If you get a great deal acquiring your property and do an excellent job of building the right property, you can immediately add value to the place and obtain instant equity. You may be able to use that equity for other investments such as leveraging more properties.
Create a dual property. You can build an investment property that accommodates more than one tenant. You may also opt for a granny flat on your property. It is one of the benefits of building an investment property compared to buying an already-established property. You can construct a house anywhere you want on the property and decide on the architecture that will allow you possibilities in the future.
You qualify for depreciation. You can depreciate the construction cost of your newly built property for a period of years. The good thing about property depreciation Sydney is that you can also include the fittings and fixtures in your claim considering that everything is brand new. Also, if you have a positively geared property, you can maximize your tax benefits.
As the value of your investment property increase over time, it is inevitable that the building structure also experiences normal wear and tear. You can apply for depreciation deductions for this natural damage and be able to claim it under plant and equipment as well as capital works deductions.
Plant and equipment refer to the assets that you can remove from your investment property such as blinds, carpets, hot water systems, etc. On the other hand, capital works deductions include the building structure and permanently fixed items like doors, cupboards, sinks, and many others. Note that although most investors may apply for depreciation on investment property, the ones who construct a new house often receive higher deductions.
Attract many tenants. Besides depreciation, another benefit of building an investment property is you will attract a lot of tenants. Make sure your property is clean, stylish, convenient, and low-maintenance. Depending on the current market and your location, your property should give you a low vacancy rate and a steady rental yield.
When investing in property and building a new structure on it, there are many crucial factors to consider, ensuring you reap financial rewards. Learn everything about this type of property investment, including property taxes, market trends, potential risks, returns, depreciation, price, and so on. Also, the builders you choose contribute to how long your property can weather many years of use from renters, as this impact your rent revenue.
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Investors in Australia like to invest their hard-earned money in something that gives a good return. For this reason, a large number of people in the country invest in shares and other investment while others have invested in securities exchanges. People in Australia prefer to invest in on-exchange investments.
Investment in property has also emerged as a popular investment. The ATO permits property owners to claim ATO property depreciation as a tax deduction. Property owners can claim depreciation if they earn income from their property. The deduction helps in declining property owners’ taxable income and consequently, they pay less tax.
Here are the types of income that investors must declare:
The interest that you earn from your bank accounts like term deposits is treated as an investment income. If you have earnings from other sources such as penalties from any of your investments, these should be declared. Also, if you get interest from your children’s saving account, you must declare it. It may include interest credited or paid by the government. Meanwhile, if you received bonuses from your life insurance, it will also be treated as an investment. You will be allowed a 30% tax offset out of such bonuses. You can hire experts to get your property valuation done effectively.
Shares can be described as yet another form of a dividend. When you declare your bonus shares and the company from which they came, you should provide a statement that will validate that these shares are a dividend. The company may be either a public trading trust, corporate unit trust, or listed investment business. There will be dividends with imputation credits in some scenarios and you must declare them on your tax return. It is worth mentioning that a share trader will be taxed differently from other investors. If you happen to be a share trader, you will be permitted to claim your losses as a tax deduction. For regular investors, the deductions shall be made on their capital gains. You should always hire an expert quantity surveyor to prepare your ATO tax depreciation schedule.
Managed investment trust
You must always specify any income generated from a trust investment product on your tax return. Some instances include money market, unit trust, cash management, and mortgage trust, among others. These kinds of trusts are considered investment income.
Many people struggle with this. Capital gains can be described as the difference between the amount you paid for a particular asset and the amount you sold it for. There will be some scenarios where you make a capital gain for a managed fund such as share trust, equity trust, or growth trust if it provides you a capital gain. Capital gains are usually included in your entire income and aren’t considered as an individual income, they will be taxed similarly.
Your return for all kinds of investments must be an integral part of your regular tax return. The process may be different depending on the kind of investments you have. If you have earned dividends, they will get added to your taxable income automatically. You can hire Deppro quantity surveyors to calculate your taxable income. You will also get a tax statement from your broker at the end of every financial year. The statement will include the total profits you have earned during that period. If you have filed your own tax return, make sure to include your entire profits in the report.
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When you claim depreciation it will help in enhancing cash flow from the property. As per ATO rules, businesses can specify depreciation as an expenditure while reporting the income tax return for a specific period. You may refer to tax depreciation tables 2015 when you mention depreciation as an expense. The amount will help in bringing down your taxable income. All residential property and commercial property have depreciation value. The tax regulatory authority summarizes and compiles these deductions in a report known as the tax depreciation schedule.
Here are the things that you must be aware of about the tax depreciation schedule:
1. Consult with a Quantity Surveyor
When you own an investment property, you will remain eligible to claim several tax deductions. It will directly bring down your taxable income. The deductions may include council rates, management fees, accounting fees, and maintenance expenses among others. Meanwhile, the depreciation deduction is separate as it is non-cash. It implies that you are not required to spend money when you seek to claim a depreciation deduction. Many property owners end up missing it. You should consult with an expert Quantity Surveyor who will help in maximizing claims and preparing a schedule. The main motto of all property investors in Australia is to improve their tax refund as much as possible.
The depreciation schedule contains two categories namely capital works and plant & equipment. Capital works involve the property’s actual cost, structures, renovations, and extensions. It has emerged as a vital part of the schedule. Fencing, paving, and sheds including some other permanent assets are also an integral part of this category. Meanwhile, plant & equipment includes assets such as furniture, flooring, and appliances, among others. The procedure of claim includes inspection of the building and fixing a value to each asset.
3. Lease days
The ATO permits you to claim depreciation till the time property remains available for lease. If you happen to be a new owner of an investment property, you will still be allowed for a claim. In this situation, the claim will mainly depend on the number of days the property remained available for rent. When you consult with experts and accountants, it is necessary to ask about partial claims within the year and pro-data deductions depending on the lease tenure. When you lodge your tax return Australia online, some vital details will already be filled for you.
4. Previous years claim
There are times when property owners tend to miss claiming depreciation deduction for many years due to ignorance. However, now ATO permits adjustment years after the first submission. This implies that you may file an amendment application for the missed depreciation deductions.
You must be aware of the aforementioned things about your tax depreciation schedule. Soon after you improve your property, you need to hire a professional Quantity Surveyor to help you prepare a detailed claim. Your motto must be to enhance your Yield on investment property. You should not get confused between repairs and capital works improvement. It is because the claim procedure for the two remains different. This is the reason why you need to hire a professional as it will ensure that your deductions are correct.
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Tax depreciation plays a vital role for property investors. It can significantly enhance cash flow for them when they prepare their property depreciation report effectively. They can also bring down their payable tax. The goal of an individual is to bring down tax liabilities and it can be achieved by claiming tax depreciation. And, when you desire to maximize your cash flow, you can, once again, do so by claiming all existing tax deductions.
Let’s understand the importance of tax depreciation for property investors with the following questions and answers:
Why You Must Claim Tax Depreciation Deduction?
Tax depreciation deduction, in combination with other existing tax deductions, can bring down your tax payable thus leaving more money in your pocket. A large number of investors are aware that they will be able to claim a tax deduction for property management fees, interest, repairs, and maintenance. However, some of them end up missing out on claiming tax depreciation deduction. As interest rates are quite low, tax depreciation deduction can significantly emerge as one of the major deductions claimable. They should effectively get their investment property depreciation schedule prepared with the help of reliable professionals. Depreciation deduction will bring down your taxable income and assist your property return a positive cash flow.
Will All Property Investors Require a Tax Depreciation Schedule?
It is imperative to investigate obtaining a tax depreciation schedule if you are keen to enhance all your capital allowance and tax depreciation. Owners of qualifying residential property or commercial space must order a tax depreciation schedule if they plan to claim one of their major tax deduction. You must also need to find out if your investment property qualifies or not. You may hire leading professionals who may carry out an estimate of tax depreciation deductions available for you.
How You May Claim Your Tax Depreciation Deduction?
The most convenient way to claim tax depreciation deduction is to get a tax depreciation schedule prepared from quantity surveyor tax depreciation. He will prepare your tax depreciation schedule for your accountant so that he may apply it at the right time. It is worth noting that your accountant is not eligible to assess the construction cost for generating this deduction for you. Some property investors are not aware of whether they need to pay for their tax depreciation schedule every year. It is important to note that they are not required to pay for it every year. It is because it is a one-time investment that remains completely tax-deductible in the year you buy it.
Tax depreciation holds great significance for property investors. You also need to get your depreciation schedules for rental property prepared from quantity surveyors. Free updates are allowed to be made where you have replaced, added, or improved assets or carried out small improvements. In case you have just completed major works and estimation is needed, you may have to pay a fee. You must not become such a property investor who fails to claim one of the biggest tax deductions available.
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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.
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A large number of first-time property investors find out that they will require a tax depreciation schedule sooner or later. They can obtain the tax depreciation schedule from Quantity Surveyor. Property investors can bring down their tax liability by effectively calculating depreciation tax deduction on rental property. ATO has already recognized Quantity Surveyors as the right individuals to calculate building costs for depreciation purposes. But not all Quantity Surveyors have expertise in depreciation. Depreciation experts possess the right skills to find out if your depreciation claim has been maximized or not.
Here are some interesting facts about QS that you must not overlook:
1. Passion for figures
An expert QS is passionate about numbers and prepares a depreciation schedule by making good use of these numbers. They will also evaluate the income-generating property and plant & equipment assets to assess their depreciable value. Meanwhile, the expenses of structural units like floors, walls roofs, and windows will remain eligible to be claimed as capital works deduction. The rate will be 2.5 percent every year over 40 years for any property where construction began after September 15, 1987. Calculating depreciation for plant & equipment is also not that easy. There are over 1600 depreciable plant & equipment assets identified by ATO. You can hire leading tax depreciation surveyors to assess all depreciable objects.
2. Include all plant & equipment asset
An expert QS has a great eye for detail and conducts a thorough survey of the property. They grab images of all the depreciable objects available inside and outside the building. A professional Quantity Surveyor always ensures to inspect all the objects and catalogue them so that all of them are specified on the owners’ depreciation schedule. They leave no stone unturned when it comes to calculating all the things that are depreciable. It will help in preparing effective tax depreciation reports.
3. Close relationship with accountants and property experts
They build strong relationships with Accountant and property professionals. The friendship among them remains mutual. They all work in the direction to make investment properties perform effectively for the owner. An expert QS assists investors by offering depreciation estimates to property managers and real estate agents for their listed properties. They also connect with property managers to organize an inspection period with tenants when it comes to completing the depreciation schedule.
The moment a QS concludes the depreciation schedule, a copy will be sent to you and your accountant. It will allow you to enter deductions into your annual income tax assessment. Accountants will be able to use your depreciation schedule to assist you to claim deductions consistently. You can also adjust any tax returns that were submitted in the last two years in case deductions were not claimed or maximized.
An expert QS will utilize tricks like instant write-off and less value pooling to let investors enhance their deduction. An expert QS will also be able to prepare a strata property act depreciation report without any hassle. They adhere to books and work closely with ATO to remain updated on the latest depreciation legislation and tax rules. They strive to follow ATO guidelines religiously to make sure that claims are valid.
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Converting a residential property into an investment one is increasingly becoming more common among property owners. Sometimes it is due to circumstances like moving to a different city or property, while other times it is simply a way of earning money from the property. But turning a house into an investment property is not as simple as it sounds. Let’s look at things like depreciation on investment property that you should consider before making the decision.
New Taxes and Deductions
Converting a residential property to an investment property completely changes your tax schedule. The income you now earn from the investment property, like rent, is taxable. However, you may also be eligible for several tax deductions offered by the ATO. These include maintenance cost of the property, interest cost on property loans, and other expenses.
Depreciation is one of the most important deductions that investment property owners can claim. Depreciation is the loss in value of the property or its assets caused due to the general wear-and-tear that occurs with time. The ATO allows depreciation on residential rental property and investment property as tax deductions.
There are two ways to claim tax deductions for depreciation. Under capital works deduction, you can claim depreciation for all the structural assets in the property. This includes all fixtures that are considered integral parts of the property. The majority of depreciation deductions are covered under capital works. The other category is plants and equipment, which covers the remaining assets within the property.
The depreciation of property works exponentially; new properties lose their value much faster than old ones. Hence, owners of old properties often do not consider depreciation deductions significant tax deductions. However, all tax deductions help the pocket, be it big or small. It is always wise to consult a property expert to form a depreciation schedule for investment property before you convert it to commercial purposes.
A primary residential property is exempted from capital gains tax (CGT) in Australia. But when that property is converted into an investment property that exemption no longer applies. Various forms of CGT are applicable to the investment property depending on various factors like duration of ownership. Meet with an accountant to understand how to minimise the CGT before you convert your property.
Insurance is one of the absolute necessities for any kind of property. It is also one of the things to consider when converting your home to an investment property. Most home insurance does not cover commercial properties since the risks involved are quite different. So everything, from home itself to the assets within it, will need to be insured again. Meet with an agent to discuss your exact insurance needs.
Converting a residential property to an investment one can certainly be an exciting affair. However, it is important to do it with the right knowledge and planning like depreciation reports. Only then you will be able to maximise your profits.
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Renovation is an essential aspect of maintaining and improving a property, but it is not always done for the looks alone. Many property investors opt for renovation before selling or renting the property to another party. But what is often missed is the possible tax claims from renovation, like building tax depreciation. In Australia, renovation costs can be claimed, but there are specific scenarios.
Here is what you must know about renovation and tax claims:
Renovating a Personal Property
Let’s start with the simplest case: you are renovating your primary residence. Since it is a property for personal use and not as a commercial one, this automatically excludes several tax deductions like depreciation. However, if you choose to sell the property later, all renovations carried out in the home are exempted from capital gains tax (CGT). The ATO also allows for renovations on areas adjacent to the primary property (like swimming pool) as long as the total area is less than two hectares. This too is exempted from CGT.
Renovating an Investment Property
Things are different in the case of investment properties. Perhaps the most important distinction is in depreciation. The ATO allows investment property owners to claim depreciation deductions over the cost of general wear and tear that occurs within the property. Now you might be thinking, can you claim depreciation on a rental property? Yes, you can. There are two types of depreciation deductions: the structural components under capital work deductions, and equipment assets installed within the property.
However, there is a very important caveat to this. As per the 2017 legislation, depreciation cannot be claimed in the case of second-hand properties. If you are renovating your property while living in it, and later renting it out, everything within it would be considered second-hand. Even the new equipment installed during a renovation would now be excluded from depreciation deductions. It is therefore imperative to ensure that you are not living in the investment property while carrying out the renovations. Not only this, but the property should also be listed as “for rent” before you actually being the renovations.
The 2017 legislation does offer some exceptions. For instance, rental properties that have undergone a ‘significant’ renovation are exempted from being treated as second-hand when sold. Most importantly, new properties remain unaffected and offer the most significant tax deductions.
‘Scrapping’ During Renovation
Scrapping refers to the removal of assets that are considered depreciable. This includes faucets, carpets, cupboards, etc. During the renovation, most property owners are focussed on claiming depreciation on a rental property and don’t care much about the old assets which are being discarded. However, this is a mistake. The ATO allows investment property owners to claim the depreciation cost of certain items as tax deductions. This means that you could claim the depreciation of the old items you have removed from your property in the same year as the renovation.
Renovation can change the entire appearance of your property, but it also carries some importance for the state of your finances. Carrying out renovations with the right knowledge from Deppro Perth can allow you to save a significant amount of money.
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