Property depreciation: five important points

Welcome to the New Year!  We think it is going to be a very busy one here at Pinnacle.  Let’s all work hard to achieve our goals and objectives and make 2014 the best year yet.

In the next week I will be posting a short video tutorial on the concept of depreciation and the importance of properly constructed depreciation schedules.  I will also post another blog with information and statistics which I think you will find of great use.

In the meantime – here are 5 important points to consider when dealing with property depreciation.

Happy investing!

Property depreciation: five important points

Depreciation is the key to increasing cash-flow on a residential property.  Here are five depreciation tips to assist property owners.

  1. No property is too old

    • An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is that older properties will attract no claim. It is worth making an enquiry about any property.
    • Previous tax returns can be adjusted when a property owner has not been claiming depreciation or maximising tax depreciation deductions. The previous two financial year tax returns can generally be adjusted and amended.
  1. Deductions are available for 40 years

    From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim capital works deductions has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years of property depreciation on a brand new building, whereas the balance of the 40 year period from the construction completion date is claimable on an older property.

  1. Claim renovations completed by the previous owner

    Anything in the property that occurred in a previous renovation can be estimated by a Quantity Surveyor and deductions calculated accordingly. This includes items that are not obvious, for example new plumbing, water proofing, electrical wiring or a pergola. For capital improvements to be eligible for capital works deductions, construction must have commenced within the qualifying dates which are after the 18th of July 1985 for residential and after the 20th of July 1982 for commercial buildings.

  1. There are two main areas to a property depreciation schedule: the plant and equipment and the capital works deductions

Plant and equipment items are usually mechanical fixtures or those which can be easily removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant and equipment items include but are not limited to:

Hot water systems Range hoods
Carpets Garage door motors
Blinds Door closers
Ovens Freestanding furniture
Cooktops Air-conditioning systems
The capital works deductions (also known as Division 43 or building write-off) is a deduction for the structural element of a building including items that are fixed to the structure. It is based on the historical construction costs of the building and includes materials such as bricks, mortar, plaster walls, flooring, wiring and items such as doors, tiles, windows, toilets and guttering.
  1. Use a qualified professional

    Quantity Surveyors are qualified under the tax legislation TR97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation schedules. They are affiliated with industry regulating bodies and gain access to the latest information and resources through their accreditations.

Information contained in this blog has been provided by Bradley Beer – Managing Director of BMT Tax Depreciation.