Tax depreciation for property investors

Tax depreciation for property investors

For anyone who owns or is looking at purchasing an investment property, there are some serious tax savings available through depreciation. Residential depreciation expert, Mike Mortlock explains the process and answers some common questions.

What exactly is tax depreciation?

Tax depreciation is essentially an allowance for the wear and tear on any income producing property. Depending on the age of the property, the deductions cover the building structure, and the fixtures and fittings like blinds, carpets, hot water systems, ovens and more.

What’s involved in getting a depreciation schedule?

Our first step is to speak with the client to assess whether a report is worthwhile. Once we’re sure the report will be beneficial, we’ll organise an inspection of the property through the agent or tenant. On site we’ll measure the property, take photographs and notes of the types of fittings and details of any improvements or renovations. The client will provide us with information such as their settlement date, purchase price and details of any improvements. From there we’ll complete the report within 7 days. The report starts from the client’s settlement date and lasts for 40 financial years.

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Do older properties qualify for depreciation deductions?

It’s certainly the case that with depreciation, the newer the better. However, there’s a misconception that older properties will have no deductions available. The cut-off date for the building structure is September 1987, but most older properties have renovations or improvements that will qualify for deductions. The plant assets like carpets and kitchen appliances qualify regardless of age, and are often upgraded with the renovations. The vast majority of older properties will qualify so it’s certainly worth speaking to a quantity surveyor to get an indication of your potential savings.

What does a report cost and how does it minimise my tax payable?

Most quantity surveyors charge around $600-$800 for a depreciation schedule which lasts 40 years. Over thousands of depreciation schedules, our average first full year deduction is $9,183. That means that for that financial year, the client is able to deduct $9,183 from their taxable income. So if they’re on $60,000 a year, their taxable income is now only $50,817. For that financial year based on the 32.5% marginal rate, it means the report is putting just over $2,900 back in their pocket.

What sort of deductions will a typical $450,000 to $550,000 achieve?

A brand new 4-bedroom house in Newcastle around that price will generally achieve $9,000-$12,000 within the first full financial year and around $250,000 worth of deductions over the life of the property. Older properties are much more variable, but let’s look at a real world scenario.

One of our past clients Lynette purchased a property in Waratah back in June 2014 for $430,000. The property was built around the 1960’s so there was no depreciation claim on the original building. However, the property was renovated a few months prior to her purchase. The previous owner re-clad the property, added a new driveway, kitchen, ceiling fans, air conditioning and reconfigured the internals. It was quite a lot of work and we estimated a spend of around $90,000 for the entire works. The property contained $14,883 worth of plant items (dishwashers, blinds etc.) and $81,429 worth of building works. These estimates equated to $2,036 of deductions per year on the building works and over $3,000 worth of deductions on the plant items within the first full year. Her deductions for the 2014/2015 financial year were $5,099.

Based on the 32.5% marginal rate, it was over $1,600 back in her pocket within the first year and close to $7,000 over the first 5 years.

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