Whats Happening in Finance and Property Investment

Depreciation Tips on Residential Investment Properties

John Smith - Tuesday, August 19, 2014

After talking to an property investor client recently about ways to increase cash flow, I felt it would be a good idea to provide some insights into depreciation on residential property investments.

Before I do here is a disclaimer (the price of our litigious society): Keep in mind this is a guide and you should not rely on, or attempt to benefit from this information, without talking to a qualified tax accountant or quantity surveyor.

Depreciation that can be claimed on a residential investment property is made up of two main items or categories. The first is the building or "Capital works" and the second is "Fixtures and Fittings". I also discuss scrapping, which is replacing fixtures or fittings, how to increase your cash flow by claiming deductions early, and provide some information on Quantity Surveyors.

  1. Capital Works Depreciation
  2. Fixtures and Fittings Depreciation
  3. Scrapping
  4. Increasing Cash Flow
  5. Quantity Surveyor Vs your Accountant

1) Capital Works Depreciation -
If your residential property was built after the 17th July 1985, or there were structural improvements (fences, sealed driveways, etc) made after the 26th February 1992, then there is a good chance you can claim depreciation on the construction costs relating to the building or improvements.

Now there is a little sting associated with Capital Works deductions. The amount claimed, reduces the amount you actually bought the property for (the Cost Base), which increases your capital gains. In simple numbers, if you bought a property for $100,000 and claimed $10,000 in capital works deductions, your cost base becomes $90,000. If you sold the property for $150,000 then capital gains would need to be paid on $60,000 being the sale price of $150,000 less the cost base of $90,000.

At least after 12 months your capital gains are halved, so there is still a benefit!

2) Fixtures and Fittings Depreciation -
Fixtures and fittings are all the items within an investment property that are removable, like carpet, hot water systems, etc. There are currently two methods for claiming the depreciation - (a) The Diminishing Value and (b) Prime Cost.

The diminishing value method is a lot faster than the prime cost method, in fact in the first 5 years its about 67% vs 47% depreciation available to be claimed. After 15 years both methods are approaching the 100% mark. The point here is that the diminishing method allows higher claims at the beginning, while the prime method has more constant claims over time and therefore higher claims at a later period.

Which method you want to use is up to you and based on your investment strategy - talk to your accountant. Keep in mind once you choose a method you can't change it for that property.

3) Scrapping -
Its amazing that more investors don't know about scrapping. When renovating, old fixtures and fittings like carpet, or bathroom cabinets usually get thrown out, however quite often they have a value. Before you renovate you should get a scrapping schedule from a quantity surveyor, because you are entitled to claim a deduction for the full cost of the items you are scrapping or throwing away. After the renovation you should get a new depreciation schedule done - make sure you keep your receipts!!

4) Increasing Cash Flow -
Normally depreciation is only claimed at the end of the year, and the investor gets a nice chunk of tax back. But why wait!! Now you can claim it back early by reducing the tax you pay out of your salary. Talk to your accountant about a "PAYG Withholding Variation" form. How does it work - Your accountant calculates your expected deductions, and lodges the form with the tax department. The tax department then advises your employee to reduce the tax you pay, which is reflected in your payslip and the cash you receive.

5) Quantity Surveyor Vs your Accountant -
A quantity surveyor is authorised by the tax department to determine the value of your fixtures and fittings, as long as they are also a Registered Tax Agent, whereas your accountant is not. Although an accountant can produce a depreciation schedule, it is restricted to certain items, and a quantity surveyor can depreciate many more items. Ask your accountant to make sure, or talk to a quantity surveyor, who after a few questions can usually tell you over the phone whether its worth doing.

Summary - At the end of the day, there will be some sort of depreciation you can claim. Make sure you maximise the benefits of owning an investment property.

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