7 Rental Property Depreciation Rules All Investors Should Know
Tuesday, November 10, 2020, 6:00 AM | Leave Comment
Similar to when you claim wear and tear on a vehicle purchased to produce income, you may also claim depreciation from investment properties against taxable income.
While investors are knowledgeable about this, not a lot of new property investors are aware of the ins and outs of rental property depreciation.
As a result, thousands of dollars can go unclaimed! That’s why it’s crucial to learn all about rental property depreciation to know what you’re due and make substantial savings during the next tax season.
So, read on to know more about property depreciation!
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What is Property Depreciation Anyway?
Property depreciation is a form of tax break allowing investors to offset any of their investment properties’ decline in value against their taxable income.
The Australian law permits investors to claim their tax deductions on declines in the value of the structure, items considered to be fixed on the property permanently, as well as the value of plant and/or equipment assets in it.
This will help you pay less tax and is considered a non-cash deduction, meaning you won’t need to pay on an ongoing basis. These deductions will be built in your property’s purchase price.
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Depreciation for Furniture
A lot of investors tend to miss their depreciation claim on furniture. If ever the property is furnished, the ATO (Australian Taxation Office) will allow property investors to claim the costs of furnishings as tax deductions over a certain period. These are for furnishings that were installed during the time of purchase, or items invested in throughout the rental period.
Usually, the item of furniture may be claimed over five to ten years, depending on what was stipulated by the ATO.
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Depreciation for Buildings
The depreciation claims for buildings, equipment, and the plant is usually overlooked. You’re actually allowed to claim a small percentage of the building cost and the property’s fixed structures over time.
Typically, the rate is 2.5% from the time your invested property was built and the total claim would be limited to the construction cost. A quantity surveyor can help do the exact figures for this.
While this may sound such a hassle for a smaller result, think of it this way: If you bought a property for $600,000 which cost $250,000 to build back in 2000, then you might be able to claim an extra $6,250 against its rental income each year until the year 2040!
If the property is off-the-plan and newly built, costing you $600,000 today with building costs amounting to $400,000, then you can claim up to $10,000 a year!
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Any Hidden Catches?
As you can see, you can save a ton of tax now with depreciation. However, there is a drawback: When selling the property, you’ll have to reduce the cost base (which will increase the capital gain) by your building depreciation claimed.
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About the Depreciation Schedule
The depreciation schedule is the list of depreciation allowances you’re entitled to claim, including a list of depreciable items and a schedule that shows its value decline over time.
The depreciation schedule includes the capital work deduction, along with plant and equipment allowances. You may hire a quantity surveyor for them to create a depreciation schedule, or do it yourself. Usually, this costs between $400 to $750, depending on how much work is involved and the company, though those purchasing new properties may get one for free from the developer during negotiations.
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The Methods for Calculating Depreciation
There are two ways to calculate a depreciation claim, which is the Diminishing Value Method and Prime Cost Method. The Diminishing Value Method has you claim more in the first year, then less in the future, while the Prime Cost Method will give you the same claims every year.
The method chosen depends on what will give you more in the long run.
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Extra Knowledge on Property Depreciation
There are also other things to learn about property depreciation, but one thing’s for sure: It’s best that you get help from accountants who specialize in tax for property investors. This can help you figure out if properties are worth investing in, how your property can make you money, and help do your taxes to ensure you don’t lose but save more in the long run.
Wrapping It Up
Depreciation can help you once tax comes along, as you can claim depreciation for your investment properties against taxable incomes. This is something many investors know, though it’s better to learn more about it to ensure that you don’t leave anything unclaimed.
Hopefully, this article helped you learn more about rental property depreciation! Don’t just stop there though, learn more at tax depreciation Sunshine Coast to make the most of your properties.
If you have any questions or want to share your own knowledge on rental property depreciation rules, comment below! All your thoughts are appreciated.
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