If you own investment property in Australia, here are my top ten tax depreciation tips which will help you appreciate depreciation and maximise your cash flow.
Tip 1: Maximise the cost of construction
When depreciating an investment property, the original construction cost must be used. Many of our clients are now buying properties at dramatically reduced prices – nearer to the original building cost.
So the tip is to make the most of the current market conditions and search for properties where the actual construction cost is close to the current purchase price.
By way of example, we had a client that bought a property in Sydney’s western suburbs for $250,000 recently. It was a two-year old, two-bedroom unit. We were the quantity surveyors on the project – and I know the original construction cost for that unit was $175,000. But its purchase price – brand new – was $335,000.
Guess what? We still use original construction cost as the basis for the incoming property investor.So not only has the new purchaser paid less stamp duty and increased their chance of a capital gain – their depreciation deduction relative to the purchase price has also increased.
So this property would be cash flow neutral at worse – cash flow positive at best.
Tip 2: Old properties depreciate too
Even properties built before 1985 (when the building allowance kicked in) are worth depreciating. The purchase price of your property includes the Land, Building and Plant and Equipment.
As a quantity surveyor we help you apportion or break down those categories. In about 99% of cases we find enough plant and equipment items to justify the expense of engaging our firm.
Tip 3: Use the Washington Brown Tax Depreciation Calculator
For the first time property investors can get an estimate of the likely tax depreciation deductions on a property before they buy it.
So you, as investor, can use our website, free of charge, and compare apples with oranges and see what works best for you.
For example, you might be considering buying a 5 year-old property but are concerned the depreciation deductions won’t be as high as a brand new property.
Our calculator estimates instantly what the difference will be.This calculator uses real life data collated from every inspection we do on behalf of for our clients. So the data gets more accurate with time.
Tip 4: The taller the building the higher the depreciation
Taller buildings attract higher plant and equipment allowances…and the higher the plant and equipment, the higher the depreciation.
Plant and equipment refers to necessary services within the building, as well as items within the property itself.
Some of the services required as buildings increase in height are obvious, such as a lift (transport service). Other services are less obvious, with fire hose reels and intercoms all being depreciable under this category.
The other reason tall buildings have a higher ratio of plant and equipment has to do with the amenities the developer provides. For instance, some high-rise buildings have swimming pools, gyms and even mini cinemas.
Keep in mind that a tall building doesn’t necessarily make a better investment. It often means there’ll be higher levies and additional expenses, and you own less land as well. But at the end of the day, it’s up to you to weigh up the pros and cons… and make that final decision!
Tip 5: Small items and Low Value Pooling
A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible. Individual items under $300 can be written off immediately.
An important thing to remember here is that provided your portion is under $300 you can still write it off.
For instance, say an electric motor to the garage door cost an apartment block $2000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright – as your portion is under $300.
You can also try to buy items that depreciate faster. Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate. So for instance, a $1200 television attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.
Tip 6: Don’t bother with DIY depreciation
As an expert in the market I am baffled with the number of companies offering a do-it-yourself option. I personally think there are some legal anomalies here, but more importantly – I think you will be missing out on deductions.
Here’s one example. The DIY options in the marketplace give you a tick sheet and ask you to take your own measurements. Now let’s say you measure from one bedroom wall to the other. If you do that all around the house – you would reduce the property by 10% in gross area. At approximately $1500 a square metre to build, you would have missed out on something like $15,000 worth of tax deductions!!
But don’t just take it from me….
The General Manager of the Australian Institute of Quantity Surveyors, Terry Sanders says: “The AIQS has produced guidelines for the preparation of property depreciation reports by qualified quantity surveyors, which are aimed at insuring property owners get a comprehensive and professional report that meets the ATO’s requirements.”
He adds that owners who attempt to estimate their own depreciation, or use non quantity surveying qualified people risk submitting an incomplete or poor depreciation report which “…could not only cost them in missed deductions but could also possibly attract an audit by the ATO if their report is not up to the standards required.”
Tip 7: Claiming the residual value write off
I believe millions of dollars will be missed over the coming years in tax depreciation claims due to changes in what can be defined as ‘plant and equipment’.
When I first started preparing depreciation reports, there were several factors in determining what made the list. These included whether the item was absolutely necessary in order to make the property available to be rented out. For instance a kitchen is an absolute necessity – but a microwave wasn’t.
So the moral to the story is…if you are renovating a kitchen or bathroom on a property built after 1985 – get a quantity surveyor in before you demolish so they can assess what the residual value of these items are.
That value can still be claimed as an outright deduction and can generate huge savings in the first year. For instance, a rental property with a 20 year-old $10,000 kitchen attracts an immediate deduction of around $5,000.00.
Tip 8: Furnish your property
Furnishing your property is another way to increase your depreciation deductions as it attracts higher depreciation rates.
For example, we have calculated that a $20,000 furniture package supplied by a developer can result in an additional $10,000 deduction in the first year alone.
In addition to your other depreciation opportunities furniture really can enhance your overall claim.
According to Rob Farmer, CEO of Run Property, a typical apartment in Bondi Beach for instance, can attract up to $100 in additional rent per week. But he warns that furnishing your investment isn’t necessarily the best option for all properties and locations.
It’s better suited to smaller one or two bedroom apartments in transient areas that attract short-term tenants and holiday rentals.
Tip 9: Avoid properties with a 4% Building Allowance
Residential properties built between July 18 1985 and September 15 1987 attracts a 4% building depreciation rate. Everything built since then attracts a 2.5% rate.
So, if you do buy a property built in 1986, that means 23 of its useful 25 years have been eaten away (from 2009 to 1986). You will only be able to depreciate the residual for the next two years at 4%. However, if you buy a property where construction commenced in 1989, you still have 20 years to depreciate the property, at 2.5%. That’s 50% of the original construction cost left for you – as opposed to only 8% – I know which one I would prefer!
Tip 10: Use an experienced quantity surveyor
For starters – let’s put this issue in perspective…you have just paid hundreds of thousands of dollars for a property – do you really want to save a couple of hundred tax deductible dollars on the ONLY tax break available to you that can be open to interpretation and skill?
The laws have changed frequently over the years and each building is unique, so it pays to get expert advice. I suggest you engage a firm that has been around for at least 10 years. They will have the necessary experience to analyse your property correctly.
The ATO has identified Quantity Surveyors as appropriately qualified to estimate the original construction costs in cases where that figure is unknown.
Please note – your accountant, real estate agent and property valuer are not qualified to make this assessment in accordance with the ATO.