» Older properties

What are the depreciation differences between old and new residential properties?

BMT team — Fri, 14 Sep 2018 06:18:11 +0000

Property depreciation is a non-cash tax deduction available to the owners of income producing properties. As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a tax deduction. The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors: Division 43 capital works allowance Division 40 plant and equipment depreciation The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation. Plant and equipment depreciation on the other hand, refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property. Investors often wonder about the depreciation differences of older properties compared to new properties. The simple answer is that the owners of newer properties will receive higher depreciation deductions. However, investment properties both new and old can attract depreciation deductions for their owners. Capital works deductions are calculated at a rate of 2.5 per cent of the structural costs of a building and can be claimed per year for forty years. Construction costs generally increase over time, making building write-off deductions on new buildings higher. Owners of older properties can claim the residual value of the building up to forty years from construction. For example, if an investment property is five years old, the owner will have thirty five years left of capital works deductions to claim. Capital works deductions are governed by the date that construction began. Any property that was constructed after the 15th of September 1987 attracts capital works deductions. If your property was constructed prior to that date, you should still contact BMT as you can claim for any renovations that the property has undergone, including those that were carried out by previous owners. Under new legislation passed on Wednesday 15th November 2017, owners of second-hand residential properties (where contracts exchanged after 7:30pm on the 9th of May 2017) are no longer eligible to claim depreciation on existing plant and equipment assets, such as air conditioning units, solar panels or carpet. However, owners of these properties can still claim depreciation on the plant and equipment assets they purchase for their property. There has been no change to capital works deductions, which generally account for anywhere between 85 and 90 per cent of a claim. The good news is that this means Australian property investors can still claim thousands of dollars in deductions. Additionally, if you purchased a property before 7:30pm on the 9th of May 2017, you can continue to claim as before. Find out more about the 2017 depreciation legislation changes. It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. Each and every BMT Tax Depreciation Schedule will be tailored to suit an individual’s property investment scenario, ensuring that all deductions are maximised. For further information on any property investment scenario, speak with one of the expert staff at BMT Tax Depreciation on 1300 728 726.

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Why depreciation remains relevant for older properties

BMT team — Fri, 09 Sep 2016 06:40:23 +0000

One of the most common questions specialist Quantity Surveyors are asked by investors when they call to discuss whether it’s worthwhile obtaining a tax depreciation schedule for a property is ‘how will the building’s age impact deductions found?’ While the age of a building may make a difference to the overall deductions found; it is always worthwhile making the call to discuss whether it is feasible to provide the schedule for a particular property. Many investors make the mistake of not making this call, as they assume their property will be too old and therefore think claiming the depreciation deductions won’t be beneficial. Below we’ve provided some of the main reasons why this often isn’t the case and why it’s best to seek expert advice. There are two elements you can depreciate In any investment property, there are two elements that make up a depreciation claim. These are the capital works allowance available for the gradual wear and tear of the building structure and plant and equipment depreciation for the mechanical or removable fixtures and fittings found within the property. The Australian Taxation Office (ATO) does place some restrictions on whether owners can claim depreciation for the capital works component. For residential properties, construction must have commenced after the 15th of September 1987 and for commercial properties this date is the 20th of July 1982. However, no such restrictions apply when depreciating plant and equipment items. Deductions for plant and equipment assets will be calculated based on their individual quality using an effective life the ATO set for each item. This effective life will be reset from the date of settlement. There are over 6,000 plant and equipment assets recognised by the ATO and these can result in substantial depreciation claims that benefit the property owner. Older properties have often undergone renovations If you’ve just purchased an older property, the chances are that at some time since the building was originally constructed it may have undergone some form of renovation. While sometimes renovations to a property are obvious, you may not even be aware they have occurred. Updated plumbing and electrical wiring are two good examples of work that could have been completed that aren’t obvious. Investors can claim depreciation deductions for any structural works which have been completed within the relevant dates. For an investor who has purchased a property originally constructed in 1985 for example, but with a kitchen updated and an outdoor entertaining area added in the 2010, this will mean they can claim the capital works allowance for these new additions. The cost of a depreciation schedule is worthwhile After outlaying expenses to acquire an investment property, often investors don’t want to spend any more money. The good news is that obtaining a tax depreciation schedule from a specialist Quantity Surveyor is 100 per cent tax deductible. Depreciation schedules range in cost but it is recommended to obtain a comprehensive schedule which includes a detailed site inspection of the property. Many specialist Quantity Surveyors will provide a guarantee that the deductions you will receive in the first full financial year will outweigh any costs involved in obtaining a depreciation schedule. Ultimately, the deductions you claim reduce your tax liability and therefore improve your cash return. This additional money provides investors with cash flow they can use to help offset any costs involved in holding a property. Obtaining a depreciation schedule, no matter the age of a property should be a priority for all investors. A quick phone call is all that is needed to establish an estimate of what can be claimed and discuss what is involved in the process. This article originally appeared online on Australian Property Investor. You can view the original article by clicking here.

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A case for claiming: depreciation deductions on older properties

Bradley Beer — Thu, 14 May 2015 06:31:32 +0000

There have been a number of reports recently about statistics that have been released by the Australian Taxation Office (ATO) suggesting that low interest rates have led to a reduction in the amount of claims being made for rental properties. However, there are a number of reasons why the deductions claimed by investors could be lower. Owners of investment properties continue to remain unaware of depreciation and many owners fail to ensure they maximise the deductions available to them by seeking the advice of a specialist Quantity Surveyor and obtaining a depreciation schedule. Owners of older properties in particular are prone to missing out on depreciation deductions. There are a couple of reasons for this. The first reason could be that they simply are not aware of their depreciation entitlements and therefore don’t claim these deductions. The second reason is that they assume their property is too old to be worth making an enquiry. This could stem from a misunderstanding of tax legislation, as the ATO provides restrictions for the owners of older properties in claiming capital works deductions. Legislation states that the owner of any income producing property can claim depreciation due to the wear and tear of the structure of the building (capital works deductions) and the plant and equipment contained. In older properties, capital works deductions are restricted to only those properties in which construction commenced after the 15th of September 1987. This does not mean that older property owners are unable to claim depreciation. On the contrary, these owners are still entitled to substantial deductions for the plant and equipment assets contained within the property. If any renovations have been completed, they could also still be eligible for capital works deductions as long as the renovations were completed within dates legislated by the ATO, even if these renovations were completed by a previous owner of the property. To show the difference that depreciation can make for an investor who owns an older property, let’s look at an example scenario: Case study Trent purchased an older three bedroom house built in 1970 for $500,000 just over one year ago. Prior to making a depreciation claim, Trent’s investment property was earning a rental income of $490 per week with a total income of $25,480 per annum. Expenses for Trent’s property, including interest, rates and property management fees, totaled $36,738. Toward the end of the first year of owning his property, this meant Trent’s annual after tax outlay amounted to $7,093 or $136 per week. After hearing about the benefits a depreciation claim could make to his cash flow from his accountant, Trent contacted a specialist quantity surveyor to complete a thorough site inspection of his property and provide a detailed tax depreciation schedule. The schedule outlined that Trent would be entitled to a depreciation deduction of $6,000 in the first full financial year for his property. The table shows Trent’s cash flow position with and without the depreciation claim. View table: See the table which outlines the cash flow difference to Trent’s property in more detail By arranging a depreciation schedule from a specialist quantity surveyor, Trent was able to reduce the holding costs for his property by $2,220. His outlay of $136 per week was reduced to $94.

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