Every property investor should be claiming depreciation deductions via a tax depreciation schedule.
An investment property tax depreciation schedule is a summary of the tax deductions you can claim for the depreciation of your investment property’s structural elements (such as bricks and concrete) and “plant and equipment” components (such as blinds, air conditioning and carpets).
When compiling a tax depreciation schedule, your Quantity Surveyor will want to take the following three strategic factors into account:
How long do you plan to hold the property?
Two different methods may be used to calculate the amount of depreciation claimable during any given year. In order to choose which method is best for your situation, your Quantity Surveyor will prepare a report showing both methods. On top of this, it is often possible to prepare the report with a focus on higher deductions upfront. To maximise deductions up front, or indoor over the latter years, the Quantity Surveyor will want to know how long you plan to hold your investment property.
The Prime Cost method spreads depreciation fairly evenly over the life of the building, and is ideal if you intend to hold your investment property for the long term, while the Diminishing Value method assumes higher depreciation rates, but the residual value declines more rapidly. The Diminishing Cost method can benefit investors planning to hold an investment property for a shorter term, usually five years or less.
Your overall property investment strategy will dictate how your Quantity Surveyor approaches your depreciation schedule.
Has the property been renovated? Are you planning any renovations?
If your investment property has recently been renovated or improved, your Quantity Surveyor will want to capture all “new” items to ensure you’re claiming maximum tax deductions.
If you’re planning renovations or improvements be sure to have your Quantity Surveyor inspect your property before you start. Items such as old carpets, kitchens appliances and the like will usually have a residual value that you can claim as a tax deduction – even if you’re throwing them out. Once renovations are complete, have your Quantity Surveyor complete an updated tax depreciation schedule that captures the value of new assets to be depreciated. This can sometimes be achieved within the one schedule.
Are you the only owner?
Investment property co-owners can maximise depreciation claims by having a split depreciation schedule compiled. Depending on your situation, a split depreciation schedule may help you (and your co-owner/s) qualify for a higher rate of depreciation or allow you to write off plant and equipment items faster, substantially increasing the dollars in your pocket come tax-time.
An effective tax depreciation strategy can substantially improve the performance and profitability of your investment property. Speak to your accountant and Quantity Surveyor about these three factors to ensure you’re getting the most out of your investment.