A large number of wage earners invest in property for rental income and for capital appreciation. A smart investor can save on the property tax substantially by claiming tax deductions on the decline in value of the assets, or depreciation. Owners of residential and commercial properties can claim the depreciation available for the buildings as well as the fixtures.
What is tax depreciation on a property?
A residential or commercial property investor can claim a tax deduction based on the depreciation of the assets, as long as the property is available for producing income. As a piece of land does not undergo wear and tear, the depreciation is not applicable on the land. Just like the depreciating value of a car which every commercial car owner claims annually, depreciation in property value can also be claimed yearly.
The best approach is to hire the services of an experienced quantity surveyor and assess the total depreciation of the property at the initial purchase. As per Australian Taxation Office (ATO) legislation, the depreciation is normally calculated over 40 years.
According to the calculated effective life (the number of years a property or an item is used productively), depreciation can be claimed on many household items like air conditioners, hot water systems, ovens, stoves, carpets etc.
At the very outset, an expert quantity surveyor will prepare a tax depreciation schedule for the property. They will estimate the construction cost and the cost of all the fixtures and draw out the depreciation value.
Advantages of tax depreciation schedule:
• The property owner will pay tax on their income, minus the depreciation amount every year.
• The investor will have clarity on the yearly claim from the date of completion of the construction or purchase.
• Any renovation cost can be added in the schedule in the same financial year to claim depreciation.
• The depreciation amount can be huge for a newly constructed property.
• Certain amount of depreciation can be claimed even for older properties.
• Tax depreciation deductions can be claimed all structures of the building including the wall, roof, pavement, timber frame etc.
• One can claim deductions on large numbers of fittings in the house for a period of 1 to 20 years depending on the effective life of the fitting.
While investing in property, make informed decisions. Consider the potential of the property for depreciation and save on tax.