Investing in real estate assets and properties is not a bad idea because when properly managed investment properties can be a lucrative source of income.

When someone acquires investment properties, they become aware of the costs and responsibilities of maintaining them, such as property management, landlord insurance, corporate fees, and taxes, among others.

Managing investment properties accordingly is critical if you wish to succeed. It is not just limited to spending your investment funds, but also a great deal with savings to maximise income streams through their investment properties.

Here’s a reality check. Around 80% of property investors are not fully aware of how to increase their savings by as much as thousands of dollars each year from an unlikely source – investment property depreciation.

Tax depreciation: something worth considering

Market values always go through a series of rises and falls, so do investment properties and assets that go through a similar process due to changes in the economy and other value-reducing factors. 

This reduction of values which is the result of limited effective value is known as depreciation. 

What many investors fail to realise is that this depreciation can help maximise earnings for investment properties, which can be used to offset maintenance costs, landlord insurance, and interest payments, similar to how it could write off depreciating assets in lowering the amount paid in taxes.

Two common types of claims can be made through depreciation – “capital works” and “plant and equipment.”

Plant and equipment include assets that are found within the premises of the investment property such as appliances, furniture, curtains, and carpets, while capital works make up the permanent structures, fixtures, and actual depreciation of the property itself. 

Since the land or real estate is not considered a depreciating asset, improvements undertaken on land or fixtures such as pavement and fences are considered to have limited effective life and are therefore not qualified for offset against taxable income.

Who can avail of tax deductions?

Anyone who owns an investment property can file a claim for tax deductions on the depreciation of the asset value. 

Generally, if you own property in your name, you are entitled to claim tax deductions against the property’s income. 

For joint owners such as a spouse or business partner who are both considered legal owners but must each determine their respective level of interest in the asset to determine the deductions for decline in value that is relative to their stake in the asset.

How is depreciation computed?

Computing for depreciation can be a bit complicated and dependent on laws and legislation governing each state. However, a generally accepted calculation for annual depreciation in capital works is 2.5% of the total construction cost over 40 years if the property was established after September 15, 1987. If it was completed between July 18, 1985, and September 15, 1987, it is provided with a 4% building depreciation rate over 25 years. 

For instance, an investment property that began construction in the late 1990s allows an investor 12 years to depreciate the property at 2.5%, which is 30% of the property’s original construction cost to claim for deduction.

On the other hand, plant and equipment asset depreciation is determined by two methods: diminishing value or prime cost where each eligible asset is assessed individually to determine its value and depreciation based on its limited effective life as established by the Australian Taxation Office (ATO) or as assessed by a quantity surveyor.

Is a quantity surveyor needed?

A quantity surveyor professionally appraises properties and buildings associated with construction and should be accredited by the ATO to calculate the costs of items for depreciation.

As mandated by law, such appraisals can only be made official by an ATO-accredited and licensed quantity surveyor, whose services include the following;

• Ensure the enforcement of legislation and determine eligible assets that can be written off or fall within the category of low-value and low-cost pooling;
• Identify and determine the property’s annual deductions over the next 40 years;
• Determine and account all depreciable assets and accurately provide a value for them;
• Create an ATO-compliant depreciation schedule; and
• Liaise with the investor’s or property owner’s accountant to provide a detailed depreciation schedule that outlines all deductions found on the investment property, which the accountant can factor in when preparing your tax returns.

Don’t forget that accountants are not outrightly qualified as quantity surveyors since they have different competencies and while they can calculate costs and taxes, depreciation claims shall be deemed invalid unless it was made and duly signed by a professional quantity surveyor.

How to maximise depreciation

• Always secure your tax depreciation schedule. While it may cost around $300 to $700, it’s a small investment in exchange for thousands of dollars annually on tax deductions.
• Do not neglect your older property assets. If it was built before 1987, some areas may not have been covered, so getting a free assessment with a quantity surveyor may shed light on it, such as properties that have been lying dormant and may qualify for tax deduction claims.
• Always keep a record and track renovation costs and spending. Have a quantity surveyor inspect the property before and after making renovations and document all assets. This makes it easy to calculate the depreciable value of your investment assets and provide an accurate account to help maximise your tax deduction claims.
• Reach out to your accountant or the ATO on options in case you miss out on depreciation claims that were not claimed in the past. There may be options available to amend tax claims made and entitle you to refunds. However, this is not guaranteed and will depend on the laws and legislation governing these in your area.

Knowing depreciation will help investors take a big step in maximising their investment property opportunities and get them in the right direction.