Depreciation can be one of the benefits of owning investment property. Here is a 101 guide on how it works.
What is real estate depreciation?
Real estate depreciation is a legal tax deduction linked to the wear and tear of your investment property. Simply put, you may be able to claim a tax deduction due to the aging of your property.
How much can I claim in depreciation?
The amount you can claim will vary depending on the property you purchased and when it was built. The numbers below are estimates based on the average of the actual reports we completed in Washington Brown.
If you buy a property built between the years 1987 and 2000, you may be eligible for deductions of about $ 4,000 per year, or almost $ 40,000 in the first 10 years.
If you buy a property built between the years 2000 and 2020, you will likely be able to claim around $ 6,500 per year, or almost $ 65,000 in the first 10 years that you own the property.
If you are buying a new property, you may be eligible to claim around $ 16,000 in the first year and almost $ 100,000 in the first 10 years.
Please note, however, that these figures are intended to be an empirical estimate rather than a definitive calculation of how much you will be able to claim for depreciation.
What objects can I claim on?
Typically, around 98% of the cost of building a new property can be claimed.
The only things you usually can’t claim are landscaping (trees and grass grow – they don’t depreciate) and the demolition of the previous house.
A quantity surveyor can detail all parts of the building and create what is called a “Rental building Damortization schedule ”, which is a roadmap detailing how much you can claim as a tax deduction.
In this case, a tax loss can be a good thing because it reduces your overall tax payable.
An amortization plan is generally divided into two parts. The first part lists the elements that make up the building structure (bricks, concrete, roof etc.) and is known as the “work allowance”.
The second part is about items that wear and tear faster, such as ovens, dishwashers, rugs, etc. These are known as “Plant & Equipment” and depreciate faster because they last less.
How do I get a report and how much does it cost?
You can use the free Washington Brown Amortization calculator for an estimate of the amount you could claim. This will help you decide if obtaining an amortization schedule can be a worthwhile exercise.
If you find that an amortization schedule can reduce your tax, you can get a quote from a quantity surveyor (QS).
Not all quantity surveyors are the same and the price may vary, but as a general rule you will pay between $ 400 to $ 715 for a quality report, the main variance being whether a site inspection is required.
Will my property need to be inspected?
In 2017, depreciation laws changed dramatically. You can no longer claim depreciation on previously used assets such as ovens or dishwashers. But, you can still claim depreciation on the structure even if the property is 20 years old.
This means that sometimes you will need an inspection and sometimes not.
A good quantity surveyor should appraise your property on an individual basis and advise you on the best plan for your property in order to achieve maximum depreciation at minimum cost.
How long will it take to prepare an amortization schedule?
An amortization report can take as little as three days, but sometimes up to fifteen days. Some factors that widen the gap include the need for inspection and ease of access to the property.
Location is also a factor in determining how long it will take to complete an amortization schedule. The further away you are, in general, the longer you may have to wait to get a report if your property requires an inspection.
When is the best time to prepare an amortization plan?
The best time to prepare a report is as soon as possible after the settlement date. A quantity surveyor will be able to inspect your property and see it in the condition closest to what you purchased.
The depreciation schedule is generally valid for the life of the building, but it is recommended that you update the report if you are doing renovations, repairs, or if you need to replace internal items.
Here’s another tip: If that’s okay with you, schedule a report in January when quantitative surveying businesses are not as busy and you may be in a better position to negotiate fees!
If I forgot to get an amortization schedule, can I get one now and back it up?
You can usually “backdate” an amortization plan for up to two years.
Essentially, you will need to amend your tax returns and include the depreciation figures that you missed.
The depreciation report starts from the date you move into the property – not when you hire the quantity surveyor to prepare your depreciation schedule.
There are two key steps you need to take to properly backdate depreciation:
- Work with a quantity surveyor to create a comprehensive amortization schedule for your property. They will inform you of the items that can be claimed. They will also discuss rental property depreciation rates with you.
- Take the amortization schedule to your accountant. He or she must amend your tax returns so that you claim the full depreciation to which you are entitled.
Can I claim depreciation on old properties or is it just new ones?
The laws changed in 2017 and there is a big difference between claiming depreciation on a new property versus a used property.
If you acquired a used residential building with a settlement date of May 10, 2017 or later, and it contains “previously used” depreciable assets, you will no longer be able to claim depreciation on those assets.
This is the Facilities and Equipment portion of an Amortization Schedule, including: ovens, dishwashers, light fixtures, air conditioners, televisions, rugs, living rooms, and blinds.
However, the building allowance, or claims on the building structure, has not changed at all. You will still need an amortization schedule to calculate these deductions. This part of the schedule includes things like masonry and concrete, so you can still claim depreciation on these aspects of your property.
Investors in brand new properties can continue to claim full depreciation on both plant and equipment and the construction allowance.
These government changes were made because it was felt that real estate investors were clamoring for too many second-hand depreciable items.
Can I claim renovations?
The simple answer is yes – provided the items you are purchasing are brand new.
But if you buy a used oven from Gumtree and have it installed, the item has already been used and is no longer classified as depreciable. The key, again, is the term “previously used”.
If you renovate a house while you live in it and then sell the property to an investor, the assets will be deemed to have already been used and the new owner will likely not be able to claim depreciation on the plant and equipment.
Likewise, it should be remembered that if you are buying a property that has been renovated by someone else and lived there for six months or a year prior to the sale, you usually cannot claim the property. depreciation of appliances, rugs and furniture refurbished in the future, as they have now been used before.
Cover image source: studiopure / Shutterstock.com
About Tyron Hyde
Tyron Hyde is CEO of Washington Brown, a quantity surveyor organization providing depreciation reports. He is also the author of Keep Claiming It! A guide to depreciation of property.
Thank you for visiting Canstar, Australia’s largest financial comparison site *