Depreciation on Investment Property

Are you claiming the â€œdepreciationâ€ on your investment property?
Nad Nadana-Sabesan

If you’re not, you’re by no means alone.

Up to 50 per cent of Australian small investment property owners are missing out on what has to be the best possible tax deduction available.

Incidentally, it’s no longer referred to as “depreciation”. As of 1997 with changes to tax legislation, it’s now known as a Capital Allowance and Associated Tax deduction.

What it means for people with investment properties (ie. residential, commercial, factories or travel accommodation such as hotels and motels, even hotel rooms) is reducing their tax bill by thousands of dollars each year.

The Capital Allowance part of the deduction refers to the actual construction costs of the building while the Associated Tax refers to the so-called “depreciable” items - carpets, blinds, curtains, air-conditioning, ventilation systems, fire alarms systems, light fittings, hot water units and so on.

Under the Capital Allowance deduction, residential and commercial property investors can claim 2.5% of the building cost (not the value) each year while factory and traveller accommodation investment owners can claim 2.5-4% per annum.

Where Associated Tax is concerned, they can claim 6-12% depending, of course, on the number of “depreciable” items available.

To better illustrate the value of this tax return, I’ll use the example of a residential property valued at $500,000 but with a construction cost of $300,000. Given that residential investment properties depreciate at 2.5% per annum, you’re looking at a reduction of $7,050 each year.

Add to this, the “depreciable” items, which could be in the vicinity of $1,000 - $3,000 and all up, you’re looking at reducing your annual tax bill by close on $10,000!

To qualify for Capital Allowance deductions, property investors must:

Use the property for the purpose of making an income, such as renting out
The construction of the property must have commenced by a specific period of time. In the case of residential properties (by 18 July 1985), traveller accommodation (21 August, 1979), and commercial and industrial investments (20 July 1982).
However, should you own an investment property that was built prior to these dates, you are still entitled to claim on “depreciable items”. For commercial investors this could represent between $8,000-$10,000, depending the type of building and the number furnishings and fittings.

Again, to qualify for Associated Tax deductions, property investors must use the property for the purpose of making an income.
Under the 1997 tax changes, you are also required to have your investment property valued by a professional quantity surveyor who will prepare a Capital Allowance and Associated Tax report for submission to your accountant.

This document is crucial for tax return purposes.
*Nad Nadana-Sabesan is the quantity surveyor director at JLC Valuers + Quantity Surveyors.

Posted: Friday, July 1st, 2005 Under: Property. | Home |

Byron Bay Recent News Articles

Comments are closed.