4 things property investors need to know about depreciation

When was the last time you reviewed your property portfolio including assessing its cash flow, annual capital growth as well as all expenditure and tax deductions.

Unfortunately, too many property investors don't make the most of one deduction– depreciation.

While you can only claim depreciation at the end of each financial year, it's important that you understand what deductions you may be entitled too, as they can significantly assist with your cash flow.

So what are four of the major insights that you need to understand when it comes to depreciation?

1. Itemise all repairs and maintenance expenses

It's important to keep on top of all repairs and maintenance expenditure during the year. 

A good way of doing this is to itemise all repairs and maintenance repairs on a spreadsheet as and when they happen.

By recording these expenses, including what type of repair it was such as a new hot water cylinder, your tax accountant will be able to easily identify which expenses are depreciable and which are immediately deductible.

Of course  that not all depreciation allowances can be claimed at the same rate or over the same timeframes.

These are generally dependent on what type of repair was undertaken in the first place.

It's also a good idea to provide more information than less when recording any repair and maintenance expenses to ensure you can maximise your depreciation claim.

2. Old properties can still be depreciated

Many investors think that a property constructed more than 30 or 40 years ago doesn’t warrant a depreciation schedule, but this is not always the case.

While generally it's only properties that were constructed after July 1985 that can claim depreciation, older investment properties that have been renovated or extended since that time can also claim deductions.

This makes sense, of course, because how many properties that are 30 or more years old are in completely original condition?

Most have benefited from new kitchens and bathrooms at least in more recent times to bring the property up to modern standards.

Whether you made the improvements yourself, or the renovations were the work of a former owner, there may be something that you claim because of new fixtures and fittings.

3. Scrapping Schedule

If you renovate or improve you are entitled to write off any unclaimed depreciation on the fixtures and fittings being thrown out or indeed part of the building if being demolished.

To claim this write off you will have needed to have used the premises as an investment property and prior to the work being carried out generated taxable income i.e. rent.

This expense wouldn't normally be available before your first tenant.

The scrapping schedule can be prepared by a quantity surveyor or the amounts can be identified from the existing depreciation schedule, which would show amounts not yet claimed on the item/s.

4. You could be entitled to a retrospective claim

The good news is that, if you fail to make a claim in a particular year, it doesn't mean that you'll never be able too. 

You are able to access up to two years' worth of deductions so it's important to not leave it too long, otherwise you could miss out on some significant depreciation benefits.

That's why it's so important to organise a depreciation schedule for your investment property sooner rather than later.

Ideally, you should organise for a schedule to be completed by a quantity surveyor shortley after settlement, which you can then give to your tax accountant to calculate your depreciation deductions every year from the same document.

You can then use the same schedule for the life of the property – unless your property undergoes a renovation, which will require you to have a new depreciation schedule compiled so you can take advantage of any new deductions that the refurbishment has created.

So there you have it: 4 ways you can use depreciation to maximimise the returns on your investment properties.

How can this apply to you?

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Disclaimer

This article is general information only and is intended as educational material. Metropole Wealth Advisory nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives. 

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles