Property depreciation is an example of a non-cash claim that can be made against the income produced by your investment property. In other words, unlike interest or property management fees, you don’t need to have spent the cash before you can claim a benefit in your tax return.
A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it’s used.
Buildings depreciate due to wear and tear, even though their market value may increase over time.
The Australian Tax Office allows investors to claim the value of the building at 2.5% for the first 40 years of the building’s life ( 2.5% x 40 = 100% )
For example if the cost of a build is $350,000, the investor can make a claim against the income earned in rent, at $8750 per year for the next 40 years. This is a significant deduction for the investor. The newer the property, the more years that the deduction can be claimed.
The ATO also allows investors to claim the depreciation of the plant & equipment ( or ‘fixtures and fittings’ ) in the property, such as carpets, dishwashers, cooktops and air conditioning units.
The ATO has determined what it considers to be the ‘effective life’ of these items and stipulates at what rate they can be deducted as claims against your income.
Tax avoidance and evasion is illegal but tax minimisation is not. In order to claim the highest possible rebates ans reduce your taxable income, it’s important to have a professionally prepared Quantity Surveyor’s Report for each property.
It is a one off cost, fully tax deductible and worth the cost in deductions many, many times over.
A Quantity Surveyor is a specialist in building measurement and cost estimating.A QSR ( or depreciation report) sets out for your accountant the cost of the building (capital works) and the plant and equipment.
In the case of the plant and equipment there are two methods:
(i) The prime cost method which assumes that the value of a depreciating asset decreases uniformly over its effective life.
(ii) The diminishing value method assumes that the value of a depreciating asset decreases more in the early years of its effective life.
Once the value of any item has fallen below $1000 its remaining value can be transferred into a “low pool” By doing so, you can claim depreciation for the asset together with any other low-value assets, rather than making separate calculations for each.
Governments provide incentives in a modified free enterprise economy to encourage individuals to invest and create wealth for the future.
Negative gearing rules, of which depreciation allowances are a part, encourages the supply of housing, reducing the burden on government funds and agencies to meet demand.
Rather than “crowd out” more efficient private sector activity (motivated by profit) the government provides incentives in the form of tax concessions to those willing to invest.
Investment in housing also helps to keep a limit on rents by maintaining supply and importantly, contributes to the overall health of the economy (remember the significance of housing starts in the national accounts) and therefore employment and increases the size of the ‘pie’ or the level of ‘water in the pool’!
A larger economy implies a more satisfactory answer to the economic problem – it makes possible a better standard of living.
Recent changes to legislation have been made disallowing the tax deductibility of plant and equipment in second hand homes. Brand new homes are unaffected, the full amount of depreciation can still be claimed.
This is a measure to encourage investors to build, stimulating production and employment via the multiplier effect. Properties simply changing hands does much less to achieve macroeconomic management goals such as full employment.