Understanding the concept of depreciation is crucial when it comes to managing your investment property. Each year, various factors can cause a decline in the value of your property, and comprehending these changes empowers you to make informed decisions about claiming depreciation on your annual tax returns. By maximizing the depreciation benefits within the legal framework, you can enhance your returns and reduce expenses. Read on to gain insights into the world of investment property depreciation.
What is Investment Property Depreciation?
In simple terms, investment property depreciation refers to a tax deduction that considers the decrease in value of your property, ultimately impacting your net tax return. There are two primary areas where you can claim tax deductions for depreciation:
Building structure: This encompasses the devaluation of the physical building and its permanent fixtures.
Plant and equipment assets: This includes the reduction in value of temporary fixtures like ovens, dishwashers, air conditioning units, curtains, and carpets.
How to Claim Depreciation on an Investment Property
To maximize your tax deductions for depreciation, it is advisable to collaborate with a quantity surveyor. They can prepare a tax depreciation schedule that outlines all depreciable assets within your property and the annual decline in their value. While there may be an initial cost involved in obtaining a tax depreciation schedule, the ability to maximize deductions and reduce your tax bill over the property's duration will likely outweigh this expense.
What Can You Deduct as Investment Property Depreciation?
Deductible items and expenses fall into three main categories: new assets, substantial renovations, and second-hand depreciating assets. New assets refer to fixtures you add to your investment property, such as air conditioning units, dishwashers, and carpets. Substantial renovations encompass the replacement of foundational and external walls, floors, roofing, or staircases. For properties settled before 10 May 2017, second-hand depreciating assets like kitchen appliances and lighting fixtures can also be claimed. Assets costing more than $300 must be depreciated over time, while assets costing less than $300 can be claimed for an immediate full deduction.
The Impact of Depreciation on Your Tax Return
Depreciation can significantly affect your net tax return. It is advisable to establish a depreciation schedule as soon as your investment property settles. However, if you haven't done so, it can be backdated for up to two years. Once you have a depreciation schedule in place, ensure that you keep it updated to account for new fixtures and renovations. By staying diligent with depreciation, the benefits accumulate over time, leading to increased overall returns and reduced expenses. If you haven't already set up a depreciation schedule, consult your accountant and a quantity surveyor promptly.
Please note that this article provides general information and does not constitute financial or legal advice. It is recommended to consult professional financial and legal advisors before making any decisions based on this information.