Calculating Depreciation on an Investment Property

Depreciation of a property is something that investors try to avoid. However, Australia’s tax laws can help you deal with depreciation in several ways. You just need to avoid the tax traps many fall into.

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If you’re interested in taking out a home loan to fund a real estate investment, you need to consider depreciation. This is the decline in value of the property and its contents over time.

Depreciation can dent your taxable income from the property, but there are several tax rules you can use to lower its negative impact.

Investors can claim deductions on many things that depreciate in value. These include the building, furniture, and even plants. Let’s look at how you can avoid paying too much tax when faced with depreciation.

Building Depreciation

Building depreciation takes in more than just the structure itself. It also allows you to claim for depreciation of plant and equipment fixtures. This means you can claim a percentage of the money you spend on the building and its fixtures.

Typically, this rate stands at 2.5%, which applies from the date of the property’s construction. You will need to work with a quantity surveyor, who will show you how the rate applies to the cost of the construction.

Let’s look at some examples. Say you buy an investment property today for $500,000 that cost $200,000 to build back in 2000. Using depreciation of 2.5%, you could claim up to $5,000 annually against the income you receive from rent.

Now let’s say the building cost $400,000 to build. That makes an annual claim figure of $10,000 using the same rate of depreciation as above.

Furniture Depreciation

The Australian Taxation Office (ATO) allows you to claim against the cost of your furnishings for several years after you fit them. On top of that, you can claim further deductions for any furniture you fit in the property after the purchase date.

Explaining Depreciation Schedules

A depreciation schedule allows you to figure out which items you can claim on and how much value each will lose over time.

Your schedule should include deductions for the plants, equipment, and construction work that we noted above. Some investors create their own depreciation schedules, but it often pays to employ the services of a quantity surveyor to ensure it’s correct and you don’t miss anything.

If you do use a professional, expect to pay somewhere in the region of $400 to $750. However, you may find you can get the depreciation schedule free of charge from a developer if you’re buying a newly built property.

The Methods

You can use two methods to calculate your depreciation claims:

  • Prime Cost – This is a fixed value based on the original cost or value of the items in your depreciation schedule. Thus, you claim the same amount each year for the item.
  • Diminishing Value – This method uses fluid valuation, so the amount you claim declines each year. It allows you to claim more for the item during the first year of its use, with this figure declining in the subsequent years.

What’s the Catch?

Depreciation can help you save a lot of money on your tax bill, but you will have to deal with the consequences if you decide to sell. These include deducting the depreciation you’ve claimed on the property from your cost base which increases your capital gain, making selling a less attractive proposition.

Despite this, claiming for depreciation can improve your cashflow, particularly in terms of what you receive after tax. It’s best to speak to a professional to find out whether or not depreciation claims will benefit you in the long run.

What to do next

You should always speak to an accountant or tax professional before making any decisions on how to deal with depreciation. Beyond that, real estate investors can seek help from uno home loans in the following ways:

This information is general in nature and you should always seek professional advice when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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