Depreciation of investment properties can be confusing at the best of times. Here are some of the mistakes you should be avoiding as you file your tax return for this financial year.
Property investors can claim sizeable deductions for the natural wear and tear that takes place in a building – this is property depreciation.
But many investors fail to engage a specialist quantity surveyor to prepare a depreciation schedule for such purposes and could be missing out on claiming valuable dollars back at tax time as a result.
He revealed the three most common depreciation mistakes he encounters:
1. Getting the depreciation category wrong
There are two types of depreciation deductions: capital works (Division 43) and plant and equipment (Division 40).
To make things confusing, it’s not often immediately clear which category an item belongs to, and in some cases an asset can be split between both.
Capital works relate to the wear and tear of a building’s structure and the items permanently fixed to the property, such as doors and windows. They are typically depreciated at an annual rate of 2.5 per cent over 40 years.
On the other hand, plant and equipment items can be easily removed, which include things like blinds, hot water systems and furniture.
The condition, quality and effective life will determine the allowances available for a plant and equipment asset.
A floating timber floor is one example of how this gets confusing.
Many investors mistake floating timber flooring as permanently fixed to the building and therefore a capital works deduction when it’s actually removable, making it a plant and equipment deduction.
This could mean the difference between $250 and over $1,300 in first year deductions.
A ducted air conditioning system is another example that doesn’t necessarily lend itself to logic.
The unit itself is considered plant and equipment while the ducting for the same unit falls under capital works.
Claiming an entire ducted air conditioning unit under Division 43 would result in substantially higher but incorrect first year deductions, which would come under ATO scrutiny.
2. Assuming depreciation on older properties can’t be claimed
While research has been done that confirms new properties hold the highest depreciation deductions, there are still aspects of depreciation that can be claimed on older properties.
Legislation that came into play in 2017 does mean that the depreciation of second-hand plant and equipment assets can no longer be claimed.
But this does not affect capital works deductions.
According to Mr Beer, capital works deductions make up the bulk of a depreciation claim on an investment property anyway, regardless of whether it’s a new build or not.
Second-hand property owners can still claim depreciation on all qualifying capital works deductions that, on average, make up 85 to 90 per cent of the total claim. They can also claim all new plant and equipment assets they purchase for the property.
3. Overlooking deductions
Many depreciation deductions are easily missed by the untrained eye, especially on assets that have been installed by others.
Substantial renovations where all, or substantially all, of a building is removed or replaced can hold significant deductions – even when completed by a previous owner.
Some examples of substantial renovations include replacing foundations of the building, walls, floors, the roof or staircases.
These renovations can hold tens of thousands of dollars in deductions for the new owner.
When an investor purchases a second-hand property immediately after a substantial renovation, the 2017 legislation changes don’t apply, which means the new owner can claim depreciation on all new plant and equipment assets and the capital works.
Therefore investors should obtain a proper depreciation schedule to see what deductions are available for their individual circumstances. If you require assistance with this, please contact us on 02 9211 0228.