Depreciation is a crucial idea for Australian real estate investors. You might be able to save money on taxes if you deduct the cost of an investment property.
What does Depreciation Mean?
For tax reasons, buying an investment property is typically classified as buying a building along with a number of separate depreciating assets. In this sense, property depreciation refers to a tax deduction for capital improvements made to the property as well as the decrease in value of the property's contents. Buildings, additions, modifications, or enhancements to a building are examples of capital works. Plants or items that aren't fixed to the land, like furniture and other freestanding items, make up the majority of the contents of the property.
You might be eligible to deduct capital improvements and depreciating assets for a newly constructed property. There are a lot of variables that affect how much you can deduct from your taxes. These factors include the size of the property and whether there are other shared spaces, such lobbies and elevators. A precise computation is necessary.
Why is it Important?
The purpose of purchasing investment properties is to make money, typically through capital gains and rental revenue. As a result, they are typically categorized as taxable assets. Your taxable income from your property may be offset by tax deductions based on depreciation, which take into account the assets' normal wear and tear. This could lower the amount of tax you owe.
Can I Deduct Depreciation for Older Properties?
Residential rental property constructed after 1985, is eligible for capital works deductions. A quantity surveyor or other impartial competent individual can provide you with an estimate if you are unsure of the actual construction expenses. Typically, the deduction would occur over a 25–40 year period.
How to Make a Claim?
You can use an online depreciation calculator to get a preliminary estimate. When it comes down to it, it's better to seek some expert assistance with this because it's fairly technical and sophisticated.
To start, you need hire a qualified expert to conduct an inspection and develop a property depreciation schedule based on the assets' age and other factors. This will provide you a precise estimate and guarantee that you don't overlook any assets that you might be able to claim on.
Be sure to hire a surveyor who has the Australian Institute of Quantity Surveyors' accreditation. The cost of a surveyor varies, but keep in mind that you may be able to deduct some of the expense from your taxes. Also, the fees for quantity surveyors are typically tax deductible.
You may simply share your depreciation plan with your accountant once you have one so that they can take it into account when you file your tax returns at the end of the financial year. Remember that you must maintain records of all of your income and spending, including a depreciation plan for any property you use as an investment.
How is Depreciation Determined?
Over a 40-year period, the capital works deduction is figured at 2.5% of the total building expenses. The effective life period of the relevant asset is used to determine how much is depreciated for plant-related items. The asset's useful life is essentially the amount of time it can continue to provide income. Either calculate the asset's effective life yourself or use the ATO's recommended effective life.
The Prime Cost (also known as the Straight Line Method) and the Diminishing Value Method are the two depreciation calculation methodologies provided by the ATO. In the prime cost technique, you can deduct a defined portion of the asset's value throughout the course of its useful life. The declining value approach provides a decreasing decline over time and is based on the idea that the value decline each year is a consistent percentage of the remaining value. In general, inexpensive purchases under $300 can be immediately deducted.
When to File a Depreciation Claim?
Soon after the property has settled, is the ideal time to have a tax depreciation schedule prepared. Although the schedule is still valid, it must be updated if any improvements, repairs, or asset replacements are made to the property. Before tenants come in, property owners want to have rental premises examined.
You typically have up to two years from the date the ATO issues you a notice of assessment for the relevant year to amend the tax return if you didn't do this correctly in your prior income tax return. If you want to do that, you must speak with a tax professional.
Now that you are familiar with the fundamentals of property depreciation, when you locate the ideal investment property, contact us and speak with your professional mortgage broker about current investment home loan rates and solutions.
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