We can all agree – properties are a smart investment. Whether your property is as small as a humble abode or as vast as a commercial and industrial property, they all generate a great income you can immediately grasp. But did you know that there may be a “hidden” cash flow sitting in your investment property?
We’re not just talking about the assets you can sell or the income you can gain from your tenants. We’re referring to a legit tax deduction that you might haven’t heard of by now – and we call it tax depreciation.
What on earth is a Tax Depreciation?
Depreciation is the gradual reduction in the value of an asset as time passes by, particularly due to age, wear, and tear. Now, Tax Depreciation is a deduction against taxable income acquired by an investment property as the assets depreciate. In other words, tax depreciation (or income tax deduction in fancy terms) is a hidden cash flow for investors.
Here’s how it works:
Tax depreciation is like an annual allowance for the deterioration of a property. It allows the taxpayer to deduct and recover a part of the original cost of their investment property and everything that’s in it each financial year over the effective life of the asset. The cost of the building as well as the value of some of the assets (like fittings and fixtures, construction, and renovation) whose costs have significantly reduced, can be written off as a tax deduction.
Clever property investors (or perhaps the ones with smart accountants) are able to claim depreciation as a tax deduction annually. They take hold of a tax depreciation schedule, a document that tells exactly how much depreciation you can claim on your property. Depreciation is treated by your accountant as just another tax deduction, along with council rates, water rates, and interest payments. A lot of people fail to claim it because they have no idea about it.
What can be depreciated?
If you own an investment property, there are two types of depreciation available:
Plant and Equipment Depreciation
- These are the assets related to your investment property that falls in value over time as a result of wear and tear. Assets including furniture and fittings, carpets and other floor covering, and appliances, electronic security systems, and even garbage bins.
Capital Works Depreciation
- It covers the works undertaken, including the constructions, renovations, extensions, and other improvements of the structure. Examples include plumbing, extensions for a patio, kitchen renovations, addition of a gazebo, fence, or driveways, and more.
In a nutshell, the building itself reduces its value, as do the stuff in it. Aspects of buildings and assets in these buildings can be depreciated. Buildings are written-off slowly while the assets more quickly.
This is where Quantity Surveyors enter the scene
Can’t my accountant just do tax depreciation? The answer is, no. Accountants don’t have the right skills to estimate the value of a property based on what it might’ve cost to build and renovate. With this, you have to seek the experts – the quantity surveyors.
The quantity surveyors are specialists in measuring a building and estimating its cost. Upon inspecting, they are able to determine the construction costs of a building or the value of a property, from its pre-construction to post-construction.
After inspecting your property and calculating the figures, the quantity surveyor will be discussing the completed tax depreciation schedule.
Once the tax depreciation schedule has been obtained, you just have to present it to your accountant, then you both decide which depreciation method to use and it’s lodged with your tax return.
Carmina Natividad is a savvy writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.
February 15, 2017