» residential depreciation

9 tax depreciation facts every investor needs to know

BMT team — Thu, 14 Apr 2022 00:28:49 +0000

BMT Tax Depreciation has prepared over 700,000 schedules and found clients an average of $9,000 in the first full financial year deductions. However, BMT’s research shows that up to 80 per cent of property investors still fail to take full advantage of claiming tax depreciation. When it comes to managing a property portfolio and claiming all the right deductions there is an overwhelming amount of information. So, we thought we’d break down 9 tax depreciation facts. Fact 1. Tax depreciation is the highest non-cash deduction Fact 2. Two types of property depreciation deductions Fact 3. Legislation changes don’t affect capital works claims Fact 4. Legislation changes don’t affect substantially renovated property Fact 5. The immediate deduction boosts cash flow Fact 6. New and old properties hold depreciation Fact 7. Low-value pooling accelerates depreciation Fact 8. Hidden deductions are found in common property Fact 9. Site inspections are a key to step to maximising compliant claims Fact 1. Tax depreciation is the highest non-cash deduction Tax depreciation is a non-cash deduction, meaning investors don’t need to spend any money in order to claim it. Overall, property depreciation is the second-highest deduction available for property investors. Tax depreciation comes second only to costly mortgage interest repayments. Fact 2. Two types of property depreciation deductions There are two types of depreciation deductions available to claim. The first type is capital works (Division 43). This is the building’s structure and the assets that are permanently fixed to the property. These assets can include garages, fences, and built-in kitchen cupboards. On average, capital works deductions make up 85 to 90 per cent of the total depreciation claim. The second type of depreciation is plant and equipment (Division 40). These assets are easily removable from the property or are mechanical in nature. This can include blinds and curtains, light fittings and security systems. While these typically are less than capital works, they still hold significant deductions. Due to legislative changes, there have been adjustments to how plant and equipment deductions can be claimed on second-hand properties, further explained below. Fact 3. Legislation changes don’t affect capital works claims In 2017 the Australian Government made changes to depreciation legislation. The changes meant that owners of second-hand properties purchased after 9 May 2017 could no longer claim depreciation on previously used plant and equipment assets. Investors could still claim plant and equipment deductions on new assets purchased for the property. It’s important to note the legislation changes don’t impact eligibility to claim depreciation deductions for qualifying capital works. Fact 4. Legislation changes don’t affect substantially renovated property A property is considered substantially renovated when all, or substantially all of a building is removed or replaced. Some key examples of substantial renovations include replacing foundations of the building, walls, floors, roof or staircases. If an investor purchases a second-hand property directly after its substantial renovation, the 2017 legislation changes do not apply. This means the new owner is eligible to claim on all new plant and equipment assets and the capital works. Fact 5. The immediate deduction boosts cash flow Investors can further boost their cash flow by claiming the immediate deduction on eligible assets valued up to $300. This immediate deduction can be claimed in the year of purchase and there’s no limit to the amount of assets that can be claimed. This means that if they are eligible, the investor can potentially boost their cash flow by hundreds if not thousands of dollars. Fact 6. New and old properties hold depreciation There is a common misconception that older properties cannot hold depreciation deductions, which is false. Deductions can be found in most properties, from brand new properties to properties built over twenty years ago. Unfortunately, many investors rule out claiming depreciation as they believe their property is too old. An obligation-free tax depreciation estimate from BMT can provide the answer. BMT also guarantees to find double their fee in deductions in the first full financial year or they won’t charge for their services. Fact 7. Low-value pooling accelerates depreciation Low-value assets that aren’t eligible for the immediate deduction are often placed in the low-value pool. Low-value pooling allows owners to claim depreciation at an accelerated rate. When a plant and equipment item is allocated to the low-value pool, it can be depreciated at a rate of 18.75 per cent in the first year and 37.5 per cent each following year. An item can only be included in the low-value pool if it is a low-cost or low-value asset. Low-cost asset: opening value of $1,000 or more. Low-value asset: a written down value of $1,000 or more. When an asset’s opening value was more than $1,000 but the residual value is now less than $1,000. Fact 8. Hidden deductions are found in common property When an investor purchases a property such as an apartment or townhouse in a complex, it will often be under a strata title. Owners of these properties can claim an apportioned deduction of the common property assets under the strata. These may include elevators, intercom systems and ventilation fans. BMT’s specialist site inspectors determine the value of these assets for depreciation purposes by defining the owner’s interest in the asset. Due to depreciation only being available for a portion of the asset, it may fall into the low-value pool or will qualify for an immediate deduction. Fact 9. Site inspections are a key to step to maximising compliant claims Both the National Tax and Accountants’ Association (NTAA) and the Australian Institute of Quantity Surveyors (AIQS) recognise that physical site inspections are essential for claiming maximum deductions compliantly. Failing to conduct site inspections often results in missed deductions or errors made on the tax depreciation schedule. BMT’s specialist site inspectors conduct physical site inspections, ensuring an accurate tax depreciation schedule is completed that maximises deductions and is ATO compliant. For over twenty years, BMT Tax Depreciation has been the most trusted specialist in the industry nationwide. To learn more about how you can start […]

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Find out if a townhouse is a good investment

BMT team — Tue, 04 May 2021 23:14:16 +0000

Ever wondered if a townhouse is a good investment property? The answer comes down to your overarching investment strategy and whether a townhouse will fit into your portfolio. To help your decision-making process, we have weighed up the general pros and cons of investing in a townhouse. In this article, we will cover: The pros of a townhouse investment property The cons of a townhouse investment property Townhouse depreciation Pros Low maintenance The maintenance levels of a townhouse is a balance between the levels required for a house and a unit. Townhouse yards are often simple courtyards, smaller than those of detached houses. They provide a style of low-maintenance living for your potential tenants, which adds convenience to your rental listing. Tenant market appeal Townhouses provide low maintenance, modern designs, adequate size and proximity to amenities. All these factors attract quality tenants, which means townhouses hold high tenant market appeal. However, it’s still important to research the local market before investing in a townhouse. Even if it technically ticks all tenant-demand boxes, market supply and rental rates need to be considered. Affordability The price of a townhouse can be more suitable for your budget compared to a house in the same area. If you compared a townhouse and detached house in the same area, that of the same size and age, you will find the townhouse sits in a more affordable price-range. Common property depreciation Depreciation can be claimed on a property and its assets. Townhouse investors can claim this on their townhouse’s structure, fixed assets and other assets they own in the property such as kitchen appliances. But they also have the added benefit of claiming depreciation on eligible common property items. This can include things like garbage bins, security cameras and the driveway that links the townhouses. Cons You’re part of a strata scheme Being part of a strata scheme can limit what and how you can do updates to the property. For example, if you’re wanting to make an improvement to the property you need to go through the strata approval process. This is more of an issue if you’re wanting to make the property your own home. But when you are just making improvements to the property to fix repairs while it’s an investment you will find that there are less road blocks in the strata approval processes. Lower rental potential When compared to freestanding homes, townhouses often have lower rental returns. However, this lower rental potential can be offset by other things like lower maintenance costs and a lower purchase price. It’s important to consider all these factors in your purchase and how they will impact your cash position. Resale values Historically, townhouses experience lower levels of capital growth compared to houses in the same area. Capital growth is one of the most important ways investors make money from their investment properties. Property market waves constantly change what the capital growth outlook is, so it will be important to keep an eye on this during your townhouse ownership cycle. Townhouse depreciation We mentioned common property depreciation earlier, but it’s important to understand just how much depreciation you can claim from a townhouse. The following case study demonstrates the depreciation deductions you can expect from a new townhouse investment. Townhouse depreciation case study Pete purchased a brand-new townhouse as an investment property in 2021. The property was located in Sydney and had a floor area of 200 square metres. Following the purchase, Pete organised a tax depreciation schedule. From this, he found out he could claim a first-year depreciation deduction of $15,400 and a cumulative five-year deduction of $65,100. To learn more about depreciation and how it can make investing in a townhouse more affordable, contact BMT on 1300 728 726 or Request a Quote.

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What is a depreciation rate and how does it uncover thousands in deductions?

BMT team — Wed, 13 Jan 2021 01:27:31 +0000

One of the great things about owning an investment property is that you can take advantage of some significant tax benefits. There are many items that can be claimed as a standard tax deduction, such as interest repayments, insurances, council rates and property management fees. Claiming these kinds of expenses is straight-forward; you simply claim the full amount in the year the expense occurred. This includes ongoing or pre-paid expenses. However, there is another significant tax deduction related to investment properties that is often overlooked, called property depreciation. Depreciation is the natural wear and tear of a property and its assets over time. While every type of property depreciates, only owners of income-producing properties can claim depreciation as a tax deduction. Depreciation is different to other expenses in that it can only be claimed on the property’s structure and assets over several years. If the amount you can claim from depreciation spans over such a long time, how are you meant to know how much it can reduce your tax liabilities now? The answer is understanding depreciation rates that determine your depreciation deductions. Contents What is a depreciation rate? Set rate of capital works deductions Various rates for plant and equipment assets Finding depreciation rates with BMT Rate Finder What is a depreciation rate? To understand what a rental property depreciation rate is, a good starting point is knowing the principle behind them. The structure of the property and fixed assets are depreciated using capital works deductions. Meanwhile, the mechanical and easily removable assets are classified as plant and equipment and depreciate based on a unique effective life. Effective lives which determine depreciation rates are set by the Australian Taxation Office (ATO). The rates vary because a property’s assets are diverse. The structure and different plant and equipment assets depreciate over different timeframes. For example, you would expect an internal structural wall to wear out slowly and at a much lower rate compared to a washing machine. Set rate of capital works deductions Structural walls, doors, windows, roofing, tiles, driveways and other assets that are fixed to the structure are claimed as capital works deductions. Assets that qualify for capital works deductions depreciate over a forty-year period for residential property. This means the depreciation rates for all these assets and structures are set at 2.5 per cent (2.5 per cent x 40 = 100 per cent). On average, capital works make up 85 to 90 per cent of depreciation claims. When you consider what is included, from foundational structure to bedroom doors, the deductions stack up quickly. Various rates for plant and equipment assets Understanding the amount you can claim from a plant and equipment asset is slightly more complex. There is no ‘set’ rate, instead each asset holds a unique effective life, which determines the rate of depreciation. You also have a choice of the method of depreciation. You can either use the prime cost (PC) method that depreciates the asset at a uniform rate over its effective life. The second option is the diminishing value (DV) method that determines deductions at an accelerated rate based on its effective life. When the diminishing value method is used, the deduction is calculated as a percentage of the asset’s depreciable balance. The table below shows just some common plant and equipment assets found in residential investment properties, their effective lives and rates of depreciation. Finding plant and equipment depreciation rates with BMT Rate Finder It is impossible to know the effective life of each depreciable plant and equipment asset purely from memory. This is where BMT’s innovative Rate Finder tool makes the process easy. With just a few clicks of a button, you can find the effective life, prime cost and diminishing value method of all residential and commercial plant and equipment asset categories. BMT Rate Finder is available online and as an app so you can have this information at your fingertips. To learn more about BMT and the additional complimentary services they offer, Request a Quote or call the team on 1300 728 726. Learn more about the effective lives of assets: Understanding new tax ruling 2020/3 and how it changes effective life of assets

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How long can you claim depreciation on a rental property to maximise your cash flow?

BMT team — Tue, 20 Oct 2020 22:00:48 +0000

Rental properties come in all shapes and sizes, from studio apartments in the city to rural homesteads. The length of time that you can depreciate your rental property depends on several things. The key determining factor is the age of the property, along with its fixtures, fittings and assets. Improvements such as renovations can also stretch the length of time you can claim depreciation. In this article we explore: How long do capital works deductions last? How long can you depreciate plant and equipment assets? Can you still claim depreciation for your rental property after living in it? Claim depreciation with the specialist How long do capital works deductions last? The first element of a depreciation claim is capital works deductions. This refers to only the structural part of your rental property and fixed fittings that depreciate at an annual rate of 2.5 per cent. Some of the most common capital works deductions are found from the building’s walls, fencing, doors, built-in cupboards and roofing. On average, capital works deductions make up 85 to 90 per cent of the total claim available. Any residential building that was constructed after 15 September 1987 can take advantage of capital works deductions for forty years. However, this depends on the property’s construction and purchase date. If a property was built in 1990 and you purchased it second-hand in 2010, you can claim capital works deductions for twenty years or until 2030. Whereas, if you purchased a brand-new investment property in 2020 you can take advantage of capital works deductions for the full forty-year period and claim this lucrative deduction until 2060. If your rental property was constructed before 1987, don’t rule capital works deductions out just yet. Older properties can still get capital works deductions back in their pocket if the property has undergone a renovation. For example, if a rental property was built in 1980, and the owner completed a bathroom renovation in 2005, they can claim capital works deductions on the bathroom until 2045. How long can you depreciate plant and equipment assets? This is where determining ‘how long’ you can depreciate a rental property gets a little more complicated. Plant and equipment depreciation are claimed on the property’s mechanical and easily removable assets. Some common examples include hot water systems, carpet, blinds and ceiling fans. Each plant and equipment asset has its own dedicated effective life set by the Australian Taxation Office (ATO). Each asset also has its own diminishing value and prime cost depreciation rate, rather than a set rate. The effective life of an asset determines how long you can depreciate it. Under the prime cost method, you claim an even amount each year. While the diminishing value method results in a higher claim in earlier years. Different types of plant and equipment assets that fall under the same category can depreciate for different periods. The below table demonstrates how this works for some floor coverings. Can you still claim depreciation for your rental property after living in it? You can claim depreciation on your investment property after you lived in it, but the length of time you can depreciate it does change. The time you lived in it counts towards the forty-year lifespan of capital works deductions. For example, if a property was constructed in 2000 and you moved into it then made it an investment property ten years later in 2010, you will claim capital works until 2040 (thirty years) on the original structure. If you made a capital improvement like an extension, this changes. The capital works on the new extension would restart from the improvement date, while the original structure will continue to depreciate from the 2000 start date. Plant and equipment depreciation deductions work completely differently once you have lived in the property. Due to 2017 legislation changes ‘previously used’ plant and equipment assets in residential properties can’t be depreciated. This means you can’t claim depreciation on any of the plant and equipment assets that were in the property when you lived in it. However, new assets you purchase for the property once it’s an investment can still be depreciated for their effective lives. Claim depreciation with the specialist A tax depreciation schedule lasts the lifetime of the property, so it’s important to get it right from the very beginning. To start claiming depreciation with the leading specialist in the industry, call BMT Tax Depreciation on 1300 728 726 or Request a Quote.

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Depreciation and off-the-plan properties

BMT team — Mon, 18 Jun 2018 04:24:29 +0000

Investors who are looking to purchase a new property often look at buying off-the plan. Buying off-the-plan essentially means you are entering into a contract to purchase a property prior to, or during the construction phase of a property or a development. One big benefit of purchasing off-the-plan that investors often fail to consider is the property depreciation benefits available. There are significant depreciation deductions available to the owner of a property purchased off-the-plan. It is important to note however that the property must be completed and be generating an income to claim depreciation deductions. A completed property purchased off-the-plan will typically attract between $8,000 and $14,000 in depreciation deductions in the first full financial year, so it is fair to say that the new owner can make significant savings and increase their available cash flow by claiming depreciation for the property once it is income producing. Newly built properties constructed off-the-plan will contain new fixtures and fittings*. Therefore the depreciable value of these items will be higher. The owners are also eligible to claim the maximum capital works deductions for the building structure, which means more deductions are available to claim over the life of the property (forty years). When it comes to the fixtures and fittings in an off-the-plan property, investors should be aware that not all assets are created equal. In most cases, those assets with a higher starting cost will generate higher depreciation deductions. For this reason, investors may want to consider the brand and price range of assets in an off-the-plan property. Focusing on a kitchen in an off-the-plan property, the below table illustrates how the depreciation deductions available will vary depending on the model or price range. As you can see, those assets with a higher starting cost generate higher deductions than those with a lower base cost, both in the first full financial year and over the first five years combined. As one example, a high range oven costing $5,150 will receive $858.51 in first year deductions and $3,080.74 in the first five years, while a low range oven purchased for $1,425 will get $237.55 in first year deductions and $1,183.42 over the first five years. This is a difference of $1,897.32 in the first five years. If this is the difference an investor can see from just one asset, it’s understandable why they would want to give due thought to all the plant and equipment assets installed, as they add up to substantial depreciation differences. Please note that the low-range microwave oven purchased for $220 would receive a 100 per cent write-off in the first year. It is recommended that investors consult with their Accountant to seek advice when purchasing a property off-the-plan and also speak with a reputable Quantity Surveyor to get an estimate of the likely depreciation deductions available for the property. A specialist Quantity Surveyor such as BMT Tax Depreciation will liaise with the Property Developer to request information about the property. This information is used to provide a detailed estimate of the depreciation deductions that will become available once the property has been completed and is income producing. By obtaining this information, the owner will have a far more comprehensive idea of the end cost involved in holding the property. The additional cash flow created from a depreciation claim can be put towards future loan repayments or to help save for future investment property purchases. * Under new legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand new property will still be able to claim depreciation as they were previously. To learn more visit bmtqs.com.au/budget-2017 or read BMT’s comprehensive White Paper document at bmtqs.com.au/2017-budget-whitepaper

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Commercial versus residential property depreciation: the differences

BMT team — Mon, 01 Dec 2014 03:59:15 +0000

Often investors considering purchasing an investment property will ask whether a commercial or a residential property will provide them with more depreciation deductions. There are many important factors an investor needs to be aware of when making a choice between these two investment options. Types of depreciation, how the rules change Depreciation deductions apply to investment properties in two ways. Deductions can be claimed for the depreciation of the building structure known as a capital works deduction, and for the plant and equipment assets contained within the property. In a commercial investment property, the commencement date the Australian Taxation Office (ATO) allows investors to claim the available capital works deductions, (structural items such as the bricks, building and roof) is the 20th of July 1982. While in residential properties, capital works can only be claimed for properties in which construction commenced after the 15th of September 1987. Depending on the age and type of building, you can claim either 2.5% or 4% annually of the property’s historical construction cost for the capital works allowance. The deductions for plant and equipment assets contained in both residential and commercial properties will depend on the individual effective lives of each asset as set by the ATO. However, the ATO does deem that some assets used in one commercial industry may depreciate at a higher rate than they would in a residential property. One example of an asset which does this is carpets, which will depreciate at a higher rate in restaurants and pubs than in retail office buildings or a residential dwelling. In commercial properties, tenants can also claim In commercial properties, the ATO makes allowances for the tenants to be able to claim some depreciation for assets. Commercial tenants are able to claim depreciation on any fit-out they add from the starting date of their lease. This can include assets such as: Desks Blinds Shelving Carpet Vinyl Firefighting equipment and Security systems. If a commercial tenant removes items at the end of their tenancy and disposes of the item, they may also be able to claim the remaining depreciation for assets removed and scrapped when they vacate the property. If the owner of the asset decides to on-sell items installed or keep them for future use, this does not apply. In cases where items are on-sold the tenant should always discuss this with their Accountant as this may have other tax implications. It should also be noted that commercial building owners are also entitled to claim depreciation of assets installed and left behind by a previous tenant once a tenancy has ceased, so it is important to contact us to ensure that each party makes their claim correctly. Rules about claiming and occupancy of the property Legislation from the ATO states that a residential property owner cannot claim depreciation for a building they themselves solely occupy. They can only claim depreciation on a building that is income producing. In a commercial property however, there are ways that the owner can occupy the investment property and still be able to claim depreciation. For example, if the property is purchased by a company or a trust, the owner may still be able to occupy the premises as a tenant and claim property depreciation. It is also worth mentioning that the ownership structure can have an impact on what marginal tax rate is applied when making a depreciation claim. Consult with a depreciation expert No matter what type of property an investor chooses to buy, we can assist in providing both an estimate of the likely deductions from a property, and once a property is income producing, a comprehensive tax depreciation schedule to help you claim maximum deductions.

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