Tax Depreciation Schedules: What You Need To Know
One of the key advantages of investing in property compared to other asset classes is that it can often come with generous tax breaks.
In many cases that includes the opportunity to deduct the depreciation in value of fixed items in the property and, sometimes, even the property itself.
But to make the most of depreciation as a property investor, you’ll need a depreciation schedule. We look at how they work, what you should include and, importantly, when and how to get one.
What types of depreciation can you claim in a depreciation schedule?
There are two types of depreciation you may be able to claim as a property investor.
Depreciation on capital works. This is essentially the decline in value of the permanent assets that form part of the property, including the original cost of the property itself (ie the cement, bricks, pavers and potentially even fences).
For investment properties built after 15 September 1987, you can generally claim a capital works deduction of 2.5% a year for up to 40 years. If your investment property was built before then, you may still be able to claim depreciation for any renovations, extensions and structural additions.
Plant and equipment. This is the decline in the value of fixtures and fittings that don’t form part of the property and can be moved. It often includes items such as carpets, dishwashers, ovens, washers and dryers. Even the depreciation of the air conditioning unit and heating, as well as the hot water system, can often be claimed.
If you’ve bought your investment property after 9 September 2017, you can generally only claim plant and equipment depreciation for new items.
How does a depreciation schedule work?
A depreciation schedule simply itemises all the items in a property on which you’re claiming either capital works or plant and equipment depreciation. It also includes the rates at which you’re claiming depreciation and how much you can claim over each financial year.
Speaking of which…
How do you calculate depreciation?
The ATO lets you claim depreciation using one of two methods.
Prime cost. This involves deducting a consistent amount of depreciation across the asset’s life. For instance, if you were claiming the depreciation in value of a $150,000 extension you made to a home and the effective life of that extension was 20 years, you’d be able to claim $7,500 a year.
Diminishing value. This method recognises that assets don’t depreciate at a uniform rate. Instead, their value tends to fall significantly in their first year and then more gradually the rate of depreciation slows. For this reason, the diminishing value method applies a formula that reduces the amount you can claim over the asset’s effective life.
Who can prepare a tax depreciation schedule?
You can’t just go and draw up your only depreciation schedule and give it the ATO. You need to use an authorised quantity surveyor. They’ll inspect your property to photograph and record all items that you can claim.
Paying for a good quantity is often a sound investment – they’ll be extremely thorough and they’re likely to find items you didn’t know you could even claim. That could save you a lot of tax money in the long run.
Another reason to pay for a decent quality surveyor is that getting it wrong is likely to flag the attention of the ATO and lead to significant penalties.
When to get a depreciation schedule
The best time to get a depreciation schedule is the moment you buy an investment property. That way the quantity surveyor will be able to get the most accurate picture of what the assets you’re claiming.
You should also get your investment property valued both before and after any renovation.
If you’d like to know more about depreciation schedules, including recommendations for decent quantity surveyors in the Toowoomba area, get in touch.