Property Investment – What is a depreciation schedule and why do I need one?
In this article we explain what a depreciation schedule is, why you need one if you are a property investor and how to obtain one.
One of the reasons why investing in property helps to build wealth is that it offers the investor various tax deductions – yet many first time investors are unaware of all the tax deductions that may be available. One of the tax deductions that you can claim on your investment property is depreciation.
Depreciation is most likely the second biggest tax deduction after interest, and depreciation deductions against investment properties can save investors thousands of dollars and can make or break the profitability of a property investment.
What is depreciation?
Depreciation occurs as an item’s worth becomes less over time as it is used and it wears out. When you’re talking about a tax deduction, depreciation is a method of allocating the cost of an item over its useful life. For example, if your property has an oven that is valued at $1,000 and has a ten year life, you can claim $100 against your taxable income for 10 years on that individual item.
With an investment property, you are only allowed to claim depreciation on certain items against your taxable income. A Quantity Surveyor will be able to prepare a tax depreciation schedule to ensure you claim all tax deductions you’re entitled to including;
- Depreciation on plant & equipment: this refers to items within the building like ovens, hot water heaters, air conditioners, carpets, blinds and so on.
- Depreciation on buildings or ‘building allowance’: this refers to the construction costs of the building itself, such as concrete and brickwork.
What is a depreciation schedule?
In order to make a tax claim for depreciation, you need a report that identifies all the things that may be claimed against your tax and the current value of each item. The report must separate all the different items into the two categories mentioned above, and each item depreciates at a different rate.
Each property will be different from the next and will contain a wide variety of different items that fall into these categories. The amount of tax benefit you receive will depend entirely on the property you purchase. Many experienced property investors will deliberately choose properties that will give them the most depreciation benefits.
When should I get a depreciation schedule?
You should create a depreciation schedule as soon as possible after settlement, preferably before tenants move in. This will allow you to maximise your tax benefits and will help you to avoid causing disruption to your tenants.
If you didn’t get a depreciation schedule when you first purchased your investment property, you can still get one now and start claiming your deductions moving forward.
How do I create a depreciation schedule?
When you purchase a property, all the assets within the property are not itemised by value. What’s more, the government will not take your word for the value of the items. That means you can’t create a depreciation schedule yourself.
In order to claim any tax deductions, you will need to employ a qualified Quantity Surveyor to do a thorough inspection to identify what can be claimed and to make valuations in order to create a depreciation schedule for you. This is the only way you can legitimately claim tax deductions for depreciation.
If you purchase a brand new property, preparing a depreciation schedule is much easier as the value of the items can be easily determined. If you have an older property though, things become more complicated and that’s another reason why it is important to use a reliable professional.
A Quantity Surveyor will prepare your depreciation schedule report with a view to maximising your financial position in relation to your property assets. And their fees are fully tax deductible.
If you need support and advice in buying a property, Equilibria Finance can guide you through this process.
Anthony Landahl | Equilibria Finance
Note: This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article. Please ensure your personal circumstances are taken into consideration.