What is Tax Depreciation?
Tax depreciation expenses are not actual cash expenses. They are known as a non-cash entry. They are charges used to recover an asset’s earlier purchase. To claim tax deductions, an investor can apply for any non-cash depreciation expenses against their taxable income. An investment property is an asset that can receive tax depreciation. This can be used to lowering the amount of tax payable.
Property depreciation is the gradual maintenance to a building including the fixtures and fittings over a period of time. This tax deduction allows owners/landlords of income producing properties (being investment properties – not a principal place of residence) to claim this depreciation each financial year. A tax depreciation amount is calculated based on many variables including the cost of the investment property, age or time it was built to name a few. An accountant is capable of providing taxation advice and calculating the annual amount. However given the complexities, we recommend acquiring a tax depreciation schedule.
What is a Tax Depreciation schedule?
A depreciation schedule prepared by a specialist quantity surveying (such as BMT Tax Depreciation) helps to ensure that you are maximising the cash return from your investment property each financial year. A quantity surveyor is a qualified professional who specialises in building measurement and estimating the value of construction costs. They are able to apply their expertise during various stages of construction to ascertain the cost of building works on any residential or commercial property. The Australian Tax Office (ATO) recognises quantity surveyors as one of only a few professions which possess the required construction costing skills to calculate the cost of items for the purposes of depreciation.
When a quantity surveyor completes an investor’s capital allowance and tax depreciation schedule, two main elements are generally included:
- Capital works deduction (division 43) and
- Plant and equipment (division 40)
How many years can you claim depreciation on a rental property?
Any residential investment property purchased after 1986 is depreciated using the Modified Accelerated Cost Recovery System (MACRS), an accounting technique that spreads costs (and depreciation deductions) over 27.5 years, the amount of time the IRS considers to be the “useful life” of a rental property.
Can you choose not to depreciate rental property?
You are not required to claim any tax depreciation. However you are required to “recapture” depreciation allowed or allowable when you sell the property, in the future. This means that when selling the investment property you will pay tax on the depreciation regardless if you claimed this or not.
Do you want help buying an investment property?
There are many benefits of owning an investment property. At Crest Property Investments, we help source properties for buyers. If you’d like to learn more about buying a property, please don’t hesitate to contact us. We would welcome the opportunity to help with your property purchase.
Our YouTube channel and Market Insights also provide a wealth of information to assist you with many areas relating to property.
Information source (2018): BMT Tax Depreciation (partner of Crest Property Investments)
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
May 2018
