Property inventory will bring happy returns
Before the end of the tax year, a depreciation schedule on your investment property won't go astray, Anna Fenech reports
03 May 2006Article: http://www.theaustralian.news.com.au/story/0,20867,18958700-5001942,00.html
A KEY benefit of owning an investment property is the number of tax deductions you can claim.
That is, it is not just interest income as would be the case on a margin loan that you use to buy shares.
On an investment property, you can claim a range of expenses including strata fees, council rates, agent's fees, insurance, repairs and maintenance and depreciation.
Depreciation is an oft-neglected expense, though on a typical investment property it could well be the second biggest expense after loan interest.
Under tax law, investors can claim deductions for expenses incurred in the earning of assessable income such as rent.
According to the Australian Tax Office, claiming a depreciation expense is where you can "deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year".
Firstly, an immediate deduction (write-off) is available for single, depreciating assets costing $300 or less.
For example, a toaster in a rental property being used to produce rental income.
However, if you bought four identical chairs at $90 apiece you could not claim an immediate deduction for any of these, and the total cost is more than $300.
"Claiming depreciable items as a repair is a major trap people fall into," says Yenktesh Reddy, director of quantity surveying firm Australian Tax Depreciation Services.
"They buy something as a rental property and spend $50,000 to bring it up to liveable condition for tenants - but that is an improvement, so must be depreciated over 40 years."
Repairs such as replacing broken windows or plumbing maintenance are immediately deductible as they return the property to its original condition. But improvements such as insulation or painting must be depreciated as part of capital works over 40 years.
For construction costs, referred to as capital works deductions, depreciation is generally allowed at a rate of 2.5 per cent over 40 years. For properties where construction started on or after August 22, 1984 and up to September 15, 1987, the more generous 4 per cent a year over 25 years applies.
"The ability to claim depreciation of one sort of another goes back to 1979," notes Garry Addison, senior tax consultant at CPA Australia.
At that point, capital works depreciation was allowed for buildings - such as hotels, motels or guest houses - intended to be used as short-term accommodation for travellers.
From 1985, it applied to all residential investment properties.
And, if construction began after February 27, 1992, depreciation deductions could also be claimed for structural improvements such as extensions.
Newer properties, where construction costs are higher than for older properties, will generate higher deductions.
So will properties with recent extensions, or alterations such as removing an internal wall or structural improvements such as adding a gazebo, carport, sealed driveway, retaining wall or fence, and so on.
"You will get the best depreciation deductions in the first five years after construction of the building or following a renovation or extension," says Reddy.
Separate items, not included as part of the capital works, can be depreciated over that item's so-called useful life.
For example, floor and wall tiles are fixed to the property, as are kitchens, therefore these are included with capital works (so depreciated over 25 to 40 years) and are not separately depreciated.
Items such as air-conditioning units, stovetops, rangehoods, ceiling fans, furniture, ducted central heating units, electric, gas and solar hot water systems, and window curtains are separate items offering accelerated rates of depreciation.
Some offer a choice of using an ATO-specified life such as 6 2/3 years for a washing machine acquired before July 1, 2004, 10 years for internal window blinds and carpet acquired after that date and 13 1/3 years for freestanding furniture. Investors are advised to use the tax commissioner's estimate if there is one.
"If you have evidence that your washing machine or whatever has a shorter life, then use that, but you may have to justify it," Reddy says.
The shorter the life of the item, the greater the tax deductions.
Quantity surveyor firms specialising in depreciation schedules for owners of investment properties have sprung up in recent years. They make it easy for the investor by taking an inventory of items and spelling out the deduction allowed for each, every tax year.
"A Tax Depreciation Schedule (TDS) is simply a document that lists all your investment's various items, the amount of wear left in them (effective life) and the dollar value you can claim against your assessable income," Reddy says.
A more simple way to describe it is a report on all the items in your investment property that are falling in value. For example, Reddy cites the case of a two bedroom unit purchased for $420,000 that has total depreciation available of $178,954, with $12,755 available in year one.
"The highest deduction is in year one, and this diminishes year by year as the items get older and so on," he says.
