What every property investor needs to know about a depreciation schedule

Have you wondered what is depreciation and how a depreciation schedule can save you money?

Depreciation is a powerful tool to help investors maximise their cashflow, minimise the holding costs associated with investing and minimise their tax.

A lot has been written about various nuances within tax legislation and construction estimating.

So I wanted to take a moment to get back to the basics and things that everyone should know about a depreciation schedule, so here goes.

1. WHAT IS DEPRECIATION?

In essence depreciation is a reduction in value of an asset over time.

Under income tax law, you are allowed to claim certain deductions for expenditure incurred in gaining or producing assessable income, for example, in carrying on a business such as property investment.

Since the value of some assets decline over their effective life you may be able to claim a deduction for the depreciating cost of that asset.

Just like you claim wear and tear on a car purchased for income producing purposes, or for a computer used for business, you can also claim the depreciation of your investment property against your taxable income.

2. WHAT IS A DEPRECIATION SCHEDULE?

A depreciation schedule is simply a report that shows you the deductions you’re able to claim on your investment property each year, based on the decline in value of the structure and assets within (where they qualify).

Depreciation is not available to your principal place of residence; remember the property must be income producing.

3. WHAT IS A DEPRECIATION SCHEDULE FOR?

Its only real job is to save you paying extra tax.

The way it works is like any other tax deduction you might be familiar with.

Say you are a Doctor and you need to pay membership fees to your institute, that is normally a tax-deductible payment.

Any tax deductions you claim comes off your taxable income.

To put this another way, if you earn $100,000 a year and you have $10,000 worth of deductions in that year, the tax office now sees you as only earning $90,000 a year and that’s what you’re paying tax on.

4. WHAT SORT OF DEDUCTIONS CAN I GET?

Unfortunately, that question isn’t as easy to answer as it once was.

With the depreciation rules being changed in May 2017, it depends a lot on when you purchased, whether you ever occupied the property, whether it’s new or old and several other issues.

In general there are two types of allowances available:

• Depreciation on Plant and Equipment, which refers to items within the building
• Depreciation on Building, which refers to construction costs of the building itself.

Both these costs can be offset against your assessable income.

5. WHAT ARE THE NEW DEPRECIATION RULES?

This could get messy, but I’ll try keep it short.

Essentially if you purchase after the 9^th of May 2017 you can only claim plant and equipment items if you bought the property brand new, or installed those assets yourself, such as adding new carpet.

Plant and equipment items are generally the internal assets like blinds, kitchen appliances, air conditioning etc.

What hasn’t changed is the division 43 deductions, which consists of the structure of the building including timber, concrete, tiling, kitchen cupboards an the like.

You can still claim those deductions as per the old rules.

6. WHAT ABOUT QUALIFICATION DATES?

The property needs to have been constructed after the 16^th of September 1987 to qualify for depreciation claims on the original building structure.

If it’s built prior to that date, then only the renovations or improvements will attract deductions.

This might be things like extensions, kitchen and bathroom renovations, painting and the like.

There’s no simple rule that guarantees a report won’t be worthwhile based on the date of construction because of these renovations creating deductions.

However, if the property was built after the 16^th of September 1987, the report is going to be worthwhile under normal circumstances.

7. SHOULD I GET A DEPRECIATION SCHEDULE AND HOW MUCH DOES IT COST?

Depreciation schedule costs are around the $600-$800 mark and I wouldn’t consider going any cheaper, though cheaper options are available.

Any less than that range will necessarily involve corner cutting on the inspection or the time taken to fully maximise and tailor a schedule to the client.

As for whether you should get one, quantity surveyors should be analysing that for you.

Simply give one a call or share an online link to photos and some basic information like the age, history, purchase date and they will tell you whether the report is worthwhile.

Worthwhile normally means they’ll find at least double their fee worth of deductions within the first full year of claim.

Personally, if there’s no value to the client, we’ll never recommend having a schedule done.

I hope that helps to give an executive summary on what depreciation is and how it works.

About Mike Mortlock Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular property commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au