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Own a Rental Property? Know Your Tax Deductions

Rental properties are a very lucrative investment opportunity for those involved in real estate. Apart from creating a property as an investment, it also turns the investment as a regular source of capital from tenants. However, rental properties also come with some significant taxes. But if you are smart enough, there are ways to save on the taxes. Let’s take a look at how you can claim tax refunds on your rental property.

Capital Gains and Tax

Before we delve into claims about tax deductions, we must understand an important concept: Capital Gains Tax. A capital gain is when the selling price of a property is more than its cost base. A capital loss is the reverse; the selling price is less than the cost base. The CGT is applicable when you derive capital gains from selling your property.

To minimize your CGT, the straight route is showing the capital gains as low as possible. There are perfectly legal ways to do so, primarily by including all possible expenses into the base cost of the property. You can also apply for capital losses from previous years if any. Creating the investment property depreciation schedule and capital works schedule is another way.

Tax Deductions You Can Claim

There are a variety of expenses you can claim for tax deductions, like:

  • Advertising expenditure for finding tenants
  • Any interest incurred over property investment loan
  • Insurance of the property
  • Travel expenses incurred while traveling to inspect your property (subject to scrutiny)
  • Water costs
  • Council costs, if any
  • Management fees of your real estate, if you hired professional help for the same
  • Deprecation on residential rental property assets like air conditioners

While it seems straightforward, being able to claim these tax deductions come with certain requirements. For starters, you must maintain all physical bills and/or bank statements for transactions covered above. Two things must also be maintained accurately: depreciation schedule and capital works schedule.

The depreciation schedule lists all the properties/assets you own on the rental property. It also mentions how much you can annually claim in depreciation tax deduction on rental property. The capital works schedule consists of the building and construction costs of the rental property. It is important to maintain all the bills while you were building the property. In case the bills are amiss, one can ask an architect or builder to assess the costs involved in the construction of the property.

Tax Deductions You Can’t Claim

There are also certain costs that you can’t claim for tax deductions:

  • Any cost incurred while you used the rental property for your personal use
  • All the utility bills paid by the tenants, like electricity, etc.
  • The inherent costs associated with buying and selling of properties are already included within taxes and thus cannot be claimed for tax deductions
  • Sometimes, owners borrow money against the property, like selling its equity or mortgaging it. The costs involved in such loans cannot be tax deducted.

Note: While we mentioned that inherent fees involved in buying/selling of properties are not eligible for tax deductions, many other charges during the buying/selling can be eligible for the same. Thus, it is advisable to maintain all bills of the process.

Final Words:

Rental properties are a great investment opportunity. By claiming the tax deductions in the right way, you can increase your profits from your property even further.

Significance of Real Estate Depreciation for Rental Property Investors

Many rental property investors fail to comprehend numerous tax advantages that they are entitled too, in particular, real estate depreciation. When you own a rental property, you are bound to receive tax advantages. Real estate depreciation can be defined as an income tax deduction wherein a taxpayer can retrieve the expenses or other costs. A depreciation schedule can bring down the taxable income of investors. A large number of investors also call it; a phantom expense. The IRS allows investors to avail tax deductions on the basis of an apparent decline in the real estate’s value. Real estate depreciation expects that rental property’s value dip over a period of time due to wear and tear. The investor may get cash flow from the property and may reflect tax loss courtesy because of real estate depreciation.

Advantages of displaying investment property tax depreciation

You can avail the advantages when you show investment property tax depreciation. The main advantage is that it can bring down the overall tax burden. It can also benefit real estate investors as they can save a substancial chunk of money every year on their taxes.

Investment properties that can be depreciated for tax deductions

If you want to make your property eligible for depreciation, you need to meet certain requirements. The taxpayer needs to have possession of the rental property and can also depreciate capital improvements. You must use the property in business or income-generating activity. If a taxpayer uses the property for business as well as for personal reasons, they can only deduct depreciation for business use. And, the property needs to have a calculable advantageous life of more than one year. You may seek some professional advice on how to calculate the exact depreciation residential rental property.

Tips to calculate real estate depreciation

It is not a mammoth job to calculate the exact real estate depreciation. You can carry out the calculation in 3 easy steps given below:

  1. The real estate value is constituted by land and building values. And, depreciation applies only to the building. The first and foremost step is to allocate the property’s purchase cost. After that, the purchase cost must be allocated between the land and building value.
  2. As you know the land is not liable for depreciation, it is the building that will be subject to depreciation. The building is to be depreciated over the IRS prescribed useful life. The life is labeled as 27.5 years for residential rental property and 39 years for commercial land. Now you ought to divide the building value by 27.5 to obtain the depreciation expenditure. You can also take the help of experts to prepare the rental property depreciation schedule.
  3. Now you need to multiply the depreciation expenditure by the marginal tax rate. This will give you property tax savings from real estate depreciation.

Conclusion:

Real estate depreciation is a vital tax deduction for the scores of real estate investors. The real estate investors must not neglect it. It is crucial for investors to comprehend the fundamentals of depreciation. It will offer benefits to investors with tax planning. They will also comprehend the important after-tax investment returns. In the longer run, it will help them in claiming depreciation on a rental property.

 

How is Depreciation Applied Following Natural Disasters?

Irrespective of the country you are in, you would often hear of the havoc that natural disasters can cause. Whether it’s the bushfires in NSW or Queensland, or the Victorian floods this year, natural disasters happen with frightening regularity. While the loss of human life in such disasters is an irreparable loss, there are other ways that the victims suffer. For example, the destruction and damage of property causes losses of millions of dollars every year, for homes, offices, and commercial property. The owners of these properties find themselves in a very difficult situation. Some need to be rebuilt from scratch. Others are slightly luckier, and they can get by with replacing most of their assets.

This rebuilding and renovating after a natural disaster does often result in an almost new structure. As far as the property valuation goes, it impacts the tax payable as well. This is because the property attracts different depreciation rules after repairs following a natural disaster. Because of the different depreciation amounts and percentages, the tax-deductible due to depreciation also changes. After suffering such loss of property due to a natural disaster, the least you can do is to ensure that you don’t pay more tax than you ought to.

A Few Definitions

Before you get into the calculation of depreciation for tax purposes, it’s best to understand a few key terms that would often be used. When you need to undertake minor work in order to return your house to its earlier condition, you are said to be undertaking repairs. Sometimes, some fittings or fixtures of your house are spoilt, broken, or damaged after the natural disaster strikes. In that case, they would need to be replaced by new assets. When you undertake some works to improve the look, utility, or specifications/dimensions of some assets without replacing them, you are said to have improved or upgraded it. If you are working on your tax-related depreciation calculations yourself, it is imperative that you know and understand these terms – even if you are employing the services of a quantity surveyor, you should still be aware.

How to Calculate Depreciation?

If you wish to make an accurate property depreciation report, you need to understand the different calculations yourself. First, if it is simple repairs, then you need to immediately deduct those expenses if you do not have insurance coverage. If you have insurance, you need to also declare the insurance income you received. If your work is a little more detailed and you need to replace things, then you must first find out the residual value of that replaced asset – this is only if you do not have insurance. If you do, then before claiming depreciation on property, you must adjust the values of Individual Depreciation Assets and Capital Allowance. The flow of calculation would be similar when you are improving or upgrading your assets.

Conclusion:

There is no denying the fact that if your property is hit by a natural disaster, there is little you can do, except wait till it passes. But later, you can always make an accurate assessment of your depreciation to minimise your tax commitment.

How Much of Your Investment Property Costs Can Be Claimed on Tax?

Owning a property, while a good investment, can also be heavy on the taxes. However, only a few people know that much of it can be claimed as tax-deductible or as depreciated items. But how much and what exactly can be claimed on tax? Let’s take a better look.

Knowing the Typical Tax Deductions

To begin with, you must keep receipts of all your expenses on your property investment. Next, you should identify all the things that can be claimed for tax deductions. For land owners in Australia, there are a significant number of costs that fall under this:

  • Loan interest and fees for any ongoing loan. Both of these are usually included in the loan statement and can be directly used for deductions.
  • Land tax and council rates are tax-deductible. Body corporate fees for villas, apartments and townhouses alike are also usually tax-deductible.
  • Insurance for both the building and the landlord is tax-deductible.
  • Bookkeeping and account fees are also tax-deductible.
  • Miscellaneous costs like traveling costs to property, stationery items, phone cost, advertising for tenants, ongoing property management fees and re-letting costs are also usually tax-deductible.

Careful with the repairs

Repairs are a tricky field when it comes to tax deductions. The nature and extent of repairs usually decide whether it is tax-deductible, but it is murky waters. Ongoing maintenance operations like gardening and pest control are generally included under tax deductions. Repair of objects within the property, like a faulty water heater, might be claimed under tax deductions (though you would need to check the specifics beforehand).

When you replace an item within your property altogether, legally it no longer remains a ‘repair’ and becomes instead an ‘improvement’. Any such improvements on the property cannot be claimed for tax deductions. However, such replacements are eligible for depreciation for property.

Using depreciation for deductions

For property owners, depreciation is often the best way to get tax deductions. As mentioned before, home improvement cannot be directly deducted from tax but is eligible for depreciation. Landlords usually opt for depreciation on investment property due to the sheer range it covers, almost everything within the property – garage, kitchen floor, windows, etc. – is eligible for it. Even items used for interior decoration like carpets and curtains can be included for depreciation.

However, the range can also often get confusing. It is easy to forget what items could be applied for depreciation and what couldn’t. There are professionals like quantity surveyors that can thoroughly examine everything on your property and prepare a depreciation schedule for investment pro.

Having a professional Deppro contact number in your pocket might come in handy! For instance, all of the legal costs involved in buying a property are not eligible for tax deductions. Instead of this, costs like stamp duty and legal fees can be used to reduce your capital gains tax when you sell the property in the future.

Conclusion:

Property investments can be a costly affair, thanks to the huge taxes they incur. But if you are smart enough, you can legally save a lot of money on tax claims.

Can Depreciation on My Rental Property Be Back-Claimed?

Several property investors are not fully aware of the tax benefits they can claim from their rental property. As per ATO rules, a certified quantity surveyor can help such investors reduce their tax burden. This is on account of the depreciation on their property every year. A quantity surveyor can help them make a detailed tax depreciation schedule for rental property. This would then help reduce their taxable income. As a result, the annual tax also gets reduced. Were you aware of this? If so, then you must be claiming the due depreciation tax benefit every year. But things not stopped here. Let’s say you missed claiming the depreciation on your rental property in some previous year. You might have given up that tax deduction as lost forever. But that is not correct. You can also back-claim your depreciation benefits on rental property. Read all about it here.

How Many Years Are Back-Claims Permitted?

This would have been the first question in your mind by now. The ATO has different sets of rules for different categories of taxpayers. If you are an individual taxpayer or the owner of a small business, then you can back-claim missed returns of the last two years. For other categories of taxpayers, this period is four years. For all these periods, the date of calculation is important. ATO guidelines state that the date of notice for tax assessment is the date from when the period is considered. In case you haven’t got any notice, then the date you filed your incomplete return is considered. Also, for the same period, you can submit more than one request for amendment.

The Process for Back-Claim of Previous Years

The process begins with a simple request for amendment made to the ATO, which is free of cost. After that, you need to wait for the ATO to send you the notice for submitting the amended return. While you wait, you should get your amended rental property depreciation report readied. The ATO website does provide all details for you to do it. But you should get this done by a certified quantity surveyor or at least consult your tax accountant. That way the chances of errors are minimised.

A Review of the Entire Process

Now that you know that a couple of years of delay can be corrected, you need to understand the complete picture. ATO rules allow you to claim tax relief on account of depreciation. Depreciation is the annual reduction that your rental property suffers. This is a normal accounting principle. You can claim depreciation for both fixed assets and other fixtures and fittings.

Conclusion:

You may have submitted incomplete rental home returns in previous years. It could be simply because you didn’t know about it or you might have missed it. All it means is that you paid a slightly higher tax that year. But that mistake can be easily corrected. You can back-claim for two to four years, depending on what type of taxpayer you are. Get in touch to learn more and speak to one of our professional team members for more insight.

What Are the Different Ways to Calculate Depreciation?

For a company that owns assets, the annual asset reduction is reflected in its financial statements like the balance sheets and the tax depreciation reports. There are different ways in which the value of depreciation is calculated. This depends on the country or region, of course and the calculation method could depend on the type of a particular asset. Let us understand this with the example of strata corporations with five or more strata lots. They need to obtain a specific strata property act depreciation report.

Let us look at three different ways to calculate depreciation.

1. Straight-Line Depreciation:

This is a single dimension calculation. The basis of the calculation is the estimate of how long the life of a particular asset. The straight-line depreciation method assumes an estimated value of the asset after the passage of those many years. After that, it is a simple matter of subtracting the final value from the original value to get the amount of depreciation.

2. Sum-of-the-Years’ Digits Depreciation:

In this method, the useful life of an asset is calculated/estimated. The numbers of each of these years are totalled. So, if an asset has a 7 year estimated span, then the sum would be 7 + 6 + 5 + 4 + 3 + 2 + 1 = 28. So the rate of depreciation in the first year would be 7 / 28 = 25%. The second year’s depreciation would be 6 / 28 = 21%, and so on, till it depreciates by less than 4% in its last year.

3. Declining Balance Depreciation:

There is a difference in the ways in which the above two ways affect the depreciation amounts listed on an ATO tax depreciation schedule. The first one shows a uniform rate of depreciation throughout the expected life. The second one assumes a higher rate of depreciation in the initial years. This reduces as the years go by.

The declining balance depreciation method also takes in much higher depreciation in the initial years. The depreciation on any asset is usually written off the owner’s tax liability. That is why this method tries to write off the depreciation costs faster. The logic behind this is that most assets are more useful in their initial years.

Conclusion:

The interesting thing is that there are several more methods of calculating depreciation. The second even more interesting thing is that the rates and depreciation calculated by each of these methods would be different. That is why the services of an experienced and capable company like Deppro Victoria should be used. They have experts who would understand your business and your accounting styles. Accordingly, they would suggest the best way of calculating depreciation and claiming tax breaks.

 

How Rental Property Depreciation Works

Investment in rental property has emerged a beneficial financial decision. A rental property can be a stable source of earning for beginners. One can reap tax benefits as well on the rental property benefits. You can cut the rental expenditures from the earning of rental income thus bringing down your tax liability. Meanwhile, the other important tax deduction meant for depreciation works in a different way.  Depreciation can be defined as a process which is used for deducting the expenditure of purchasing and renovating a rental property. Instead of taking a single deduction in the year you buy or renovate the property, depreciation distributes deduction throughout the life of the property. Given below are the factors how depreciation for residential rental property works:

1. Which Property is Depreciable?

You must find out first which property is depreciable. As per the rules of IRS, you can depreciate the property if:

  • You are the owner of the property even if it is liable to a debt.
  • You are using it for any income-generating act or business purpose.
  • Property has got a determined useful life and loses its worth as a result of natural factors.
  • The property may last for more than a year.

2. When Will Depreciation Start?

When a property falls in the category of service or is ready to use as a rental property, you can apply depreciation deductions. You may continue to depreciate the property until any one of the conditions mentioned below are met:

  • If you have deducted all the cost or other bases in the concerned property
  • You leave the property from service even if you could not recover the entire cost or other bases. The property will be retired from service the moment it is not being used as an income-generating property. When you destroy it, convert it or leave it, the property will be retired from service. The property report will provide more information regarding when the property may be retired from service.

Depreciation methods:

There are three factors that will help you decide the amount of depreciation you will be able to deduct every year. These methods are the basis in the property, recovery period, and depreciation method.

Given below are the basic steps:

  • Determine basis of the property: Basis of the property is the cost of the property or money you shelled out in cash or mortgage to buy it. Settlement fees, closing costs which may include legal fees, transfer taxes, etc. are included in the basis.
  • Separate land cost and buildings: You can only depreciate the cost of building and not land, so you must calculate the value of each to depreciate the exact amount. You may require the help of experts to prepare a rental property depreciation report.
  • Decide your basis in the house: When you find out the basis of the property and value of the house, you will be able to find out your basis in the house.
  • Decide adjusted basis if required: There are possibilities that you may need to make an increase or decrease to your basis for some occasions. The occasions may take place between the times when you purchase the property until it is ready to be rented.

Final Thoughts:

Depreciation has emerged as a useful method in case you invest in rental properties. It distributes the cost of acquiring the property in the coming years and brings down every year’s tax liability. However, rental property laws witness frequent changes. Therefore, you must work with an expert tax accountant when building, operating or selling your rental property. They will also explain all of the important details of depreciation residential rental property which will prove extremely helpful.

The Advantages of Hiring a Quantity Surveyor

Are you searching for leading tax depreciation quantity surveyors in Australia to inspect your property? They play a vital role in calculating all the depreciable objects. They ensure that you do not miss out on any deductions. The major responsibility of a quantity surveyor is to carry out a measurement and cost assessment for building and construction projects. Here are some advantages of hiring a quantity surveyor:

1. They will extend their support when you need it:

Construction projects may become cumbersome if you have to complete research, paperwork, estimation, etc. all on your own. A qualified and expert quantity surveyor can take up estimation and costing exercises effectively. Deppro quantity surveyors will give you the accurate advice and assurance that you require. They will help you find out the material required, projected labor hours, and ensure that all engineering and architectural plans are all accurate and of course, legal. They will provide you all the correct guidance so that you do not get misled.

2. Project management:

The quantity surveyor has emerged as a vital part of successful project teams. They can manage the paperwork effectively and they extend their services in planning, regulatory approvals, budget, concerns related to the environment, stakeholder management, etc.

3. Effective cost management and budgeting:

A successful project depends on effective cost management and proper budgeting. Building and construction projects can turn out costly and incur additional cost due to poor planning. It becomes essential to hire a qualified quantity surveyor as they carry out a thorough analysis of your project to manage the costs and provide you advice on maintenance costs, depreciation reports, and calculating tax refunds.

4. Feasibility assessment of property:

After successful completion of the project, the quantity surveyor will assess the feasibility of how you will use the property.

5. Depreciation schedule:

As time passes, the various fittings and fixtures in your newly built property may depreciate. Therefore, it is crucial to prepare an accurate depreciation schedule to take advantage of tax savings and several other benefits. Deppro Qld can assist you with any queries and questions you might have about their professional Quantity Surveyors and how they can help you.

Conclusion:

Quantity surveyors play a crucial role in construction projects in Australia. They can effectively aid in the management of the project. Quantity surveyors help in preparing a property depreciation report. They are also popularly known as construction cost consultants. Get in Touch with Deppro QLD today to learn more and book your Quantity Surveyor.

Best Reasons to Invest in Commercial Property

Most people dream of owning their own home. Those who can cross that first hurdle, often go on to their second or third home. Obviously, they do not plan to stay in all of them by turns. The subsequent purchases are for investment purposes only. They give the owner the option of renting or selling it outright for a profit. Additionally, whether you rent or sell, it also gives an option of claiming depreciation on property. There is another option that is popular with investors – commercial property. In this post, we are going to try to help you understand the implications of commercial property investment.

Tax Benefits

The first thing any investor looks at is whether a particular investment brings any relief from tax. A commercial investment property offers tax deductions in two ways. The first is on the capital works expenses made on immovable parts of the property. The second is the depreciation due to plant and equipment. This refers to additional fixtures and fittings that you have spent money on. If you can prepare an accurate and detailed depreciation schedule with the help of a professional, you can indeed save a lot of tax.

Robust Yields

The primary reason for any investment is to sell at a price higher than the purchase price. The property tax depreciation mentioned above is only a bonus. But it is not the most important benefit of investing in a commercial property. The most important benefit is the better returns it usually provides on resale. This is especially when you compare with the average returns of investing on a residential property. This is the primary reason why discerning real estate investors always prefer to deal in commercial properties.

Low Initial Investment

We know that the rental income from a commercial property would be much higher than a residential property. In spite of this, the initial cost of a commercial property is much less. This allows you to begin investing without a very large corpus.

Conclusion:

The purpose of this Deppro review is not to compare the relative merits of investing in a commercial property vs. residential property. We only seek to highlight some of the best reasons to invest in commercial property because many of them are less known to investors. If you are an investor, then you must surely keep commercial properties as part of your portfolio.

7 Questions You Should Ask Your Quantity Surveyor

Before that time of year rolls around again, when you have to file your tax return, you need to begin preparing your documents. While the income and expenditure are fairly straightforward, most people get stuck while preparing their tax depreciation schedules. That is why most people lean on professional tax consultants for this. If you own an investment property or a rental property, you may also require the help of tax depreciation surveyors who can make an assessment of your property and then prepare the submission schedule. Before you hire the services of such a surveyor, there are some important things which you should ask your quantity surveyor.

1. Do You Have Certified People Or Will You Outsource?

The survey work for property depreciation schedules can’t be done by just anyone; only certified and qualified surveyors can do it. But many tax consulting firms outsource the work of surveying to smaller firms. In such cases, you run the risk of having the survey done by someone who isn’t certified. Therefore, it is vital that you check with the firm as to whether they outsource any of their work.

2. Do You Have Insurance Coverage?

Surveying involves a whole lot of measuring at your property, for which surveyors need to often climb ladders or onto roofs. If they suffer a fall or any other kind of mishap, it would pose a major issue. That is why it is advised that you only hire firms who have insurance coverage.

3. What Are The Services You Provide?

The quantity surveyor tax depreciation only do the survey and measurements. After that their would need to prepare your returns as well. That is why you need to find out whether the firm you are employing only does surveys or can they provide end to end services.

4. Do You Have Any Questions For Me?

Every property has its own special features and would be differently treated by tax laws. Before the surveyor begins his or her work, you need to show them around and ask questions about your property. The answers to those questions and the surveyor’s own questions to you would tell you how well the survey would be done.

5. What Elements Would Be Included In The Depreciation Report?

Like we previously mentioned, a quantity survey is the start of your tax declaration and claims process. The Deppro quantity surveyors would finish their job and hand it over to their colleagues who would complete the rest of the process. You need to know from the surveyor what elements he or she will include in the report because that would determine the tax deduction amount.

6. What Categories of Properties Do You Handle?

It is important to learn what kind of properties their firm specialises in. There are firms which would be doing the surveys for commercial or industrial properties only. So, they might not have the required expertise regarding residential properties. It is preferable to work with someone who knows their stuff.

7. What Is Your Fee Structure?

Last but not the least; you need to know how the surveyor would charge their fees. There are some who charge a flat fee, while there are others who charge as per the square feet area of the property. There could be some others who charge a percentage of the total amount in the depreciation schedule.

Conclusion:

Asking the above questions will not only help you know how professional your quantity surveyor is, but it will also help you learn some extra information about your own property.   If you think there should be some more questions which are important to ask your quantity surveyor, please let us know so that we can share those with our readers and customers in our next post.