When property investors are preparing their annual income tax return, it’s important to organise a tax depreciation schedule for any recently purchased properties.
Even if you have purchased a property in the lead up to the financial year and only owned it for a short period of time, there are still depreciation benefits.
Partial year depreciation deductions can be maximised by your quantity surveyor by applying a pro-rata depreciation calculation, resulting in extra cash for you.
In this article we will explore:
Partial year depreciation deductions
Investors can claim pro-rata depreciation deductions for the period their property is rented out or is genuinely available for rent. That is, the property is given broad exposure to potential tenants and considering all the circumstances tenants are reasonably likely to rent the property.
This is particularly important for holiday homeowners as the property may only be rented during peak seasons like Christmas and New Year. If you use your holiday property for both private and income-producing purposes, you can only claim a deduction for the period where it is income-producing.
Partial year depreciation deductions may also apply to investors who have previously used the property as a primary place of residence. Be sure to speak to your quantity surveyor to ensure you claim correctly.
BMT Tax Depreciation use legislative tools to make partial year claims more beneficial to new investment property owners. Methods used in pro-rata depreciation calculations include applying the immediate write-off rule and adding eligible assets to a low-value pool.
An immediate write-off applies to any item within an investment property with a value of less than $300, regardless of how long the property has been owned and rented. As an investor, you’re entitled to write-off the full amount of the asset in the first year.
For example, if you purchase a new smoke alarm valued at $50 for your investment property, you can claim 100 per cent of the cost in the year of purchase.
Low-value pooling is a method of depreciating plant and equipment assets which have a value of less than $1,000. Any plant and equipment assets with a value of less than $1,000 can be included in a low-value pool and written off at an accelerated rate to maximise deductions. Item can be depreciated at 18.75 per cent in the first year and 37.5 per cent each year thereafter. This amount can be claimed in full in the relevant financial year regardless of how long the property was held for, even if it was one single day.
Two types of depreciable assets can be allocated to a low-value pool:
- Low cost asset: a depreciable asset that has an opening value of less than $1,000 in the year of acquisition
- Low value asset: a depreciable asset that has an opening value of greater than $1,000 in the year of acquisition but the value after depreciating over time is now less than $1,000. This will only apply if you’ve previously used the diminishing value method.
For example, if you purchase a hot water system worth $1,500 it can be depreciated using the diminishing value method. Once its depreciable value falls beneath $1,000, it will be added to the low value pool as it’s considered a low value asset. On the contrary, if the hot water system cost $900 at the time of purchase it would be automatically added to the pool as a low cost asset.
It’s important to note that once an item is placed in a low-value pool, it cannot be taken out.
Assets which form part of a group with a total cost exceeding $1,000 can cause confusion for property investors so it’s important to speak to an expert to clarify what can and cannot be claimed in a low-value pool.
Talk to an expert
To ensure all depreciation deductions are claimed correctly for the period a property is income producing or available for rent, investors should request a tax depreciation schedule.
A BMT Tax Depreciation Schedule will outline all qualifying deductions from the date of settlement and include a partial year depreciation claim that is calculated pro-rata based on the time the property is rented.