Being a property investor means you can claim more tax deductions than ever before. On the flipside, it also means you’re faced with more expenses.
These expenses can stack up quickly, the key is to claim them correctly to ensure nothing is missed. Understanding the difference between rental property depreciation and expenses will help you reduce your tax liabilities and put more money back in your pocket.
What is depreciation and what is an expense?
The important thing to know is that both depreciation and rental property expenses are tax deductible. This means they reduce your taxable income and you pay less tax each year.
An expense is deducted in the financial year it’s paid. Some common expenses include interest repayments, insurance, property management fees, maintenance and repair costs, council rates and strata fees.
While property depreciation is also a tax deduction, it’s not actually an expense. This is because it’s the natural wear and tear of the property and its assets over time. Depreciation is sometimes called a non-cash deduction, because you don’t need to spend any money in order to claim it.
|Spot the difference: depreciation vs expense Emily owns a rental property and the property’s metal roof had to be completely replaced due to hail damage. Emily is planning on holding her rental property for a long time, so she replaced the roof with new slate tiles.
Will Emily claim this as an expense or as depreciation?
While at first glace this may look like a repair, and therefore can be immediately claimed, Emily can only claim the new roofing as a capital works depreciation deduction.
This is because she has completely replaced and improved the roof. She will claim 2.5 per cent of the roof’s value each year for forty years, providing a lucrative boost at tax time.
How to claim an expense
Rental property expenses are simply deducted from your taxable income. Receipts of the expenses are generally required, and your accountant can calculate the deduction on the spot. MyBMT’s income and expenses tool is a free tool that has been developed to help you log and track your expenses.
How to claim depreciation
You need to complete a few more steps in order to claim property depreciation.
Capital works deductions refer to the structural component of the building, such as the roof, walls and staircases. These deductions are calculated at a rate of 2.5 per cent for up to forty years.
Plant and equipment include the mechanical and easily removable assets like the blinds, carpet and smoke alarms. These assets can be deducted based on their effective life, as an immediate deduction or in the low-value pool.
The best way to claim this depreciation is by having a tax depreciation schedule prepared by a specialist quantity surveyor. Your schedule lasts the lifetime of your property, and the fee is 100 per cent tax deductible. Your accountant will then use this schedule to determine your depreciation deductions each year.
Learn more about the BMT process here and what’s involved in preparing a tax depreciation schedule.
Common mistakes when claiming expenses and depreciation
Mistake 1 – mixing up repairs and improvements
Repairs are classed as an expense, for example fixing part of a rusted gutter or patching a hole in a wall.
An improvement is different to a repair and must be claimed as depreciation. Using the gutter as an example, if you replaced the entire gutter, it’s a capital improvement and must be depreciated.
Mistake 2 – completely missing out on depreciation deductions
BMT research suggests that around 80 per cent of property investors aren’t taking full advantage of depreciation deductions.
This is due to several reasons such as investors believing their property is too old, or simply being unaware of depreciation’s availability. The best way to safeguard yourself from this mistake is to request an obligation-free estimate of likely deductions on your property here.
BMT Tax Depreciation is the specialist
You need to work with the best in the industry to ensure you claim every depreciation deduction you’re entitled to.
BMT Tax Depreciation has been the most trusted specialist for over twenty years. Having completed over 700,000 schedules to date, BMT knows how to maximise depreciation claims correctly.
To learn more about depreciation vs expenses for your rental property, contact BMT on 1300 728 726 or Request a Quote.