Data reported by the Australian Taxation Office has revealed that property depreciation is the highest non-cash deduction claimed by investors.
However, myths surrounding depreciation have some investors asking: ‘what happens if I don’t claim depreciation my rental property?’
You can’t simply not depreciate your rental property as it’s a natural process of wear and tear. You can choose not to claim depreciation as a tax deduction. But what happens when you do this and how can it be detrimental to your investment success?
In this article we will look at:
- What is depreciation?
- Why an investor wouldn’t claim depreciation
- I don’t claim depreciation on my rental property but want to start, is it too late?
What is depreciation?
Imagine claiming money back when you haven’t spent any. Sound too good to be true? Well this is essentially how depreciation works.
Depreciation is the natural wear and tear of a property and its assets over time. While all types of properties and assets depreciate, including your own home and car, you can only claim depreciation from income-producing assets such as your rental property.
The structure of your property such as the walls, roofing and doors can be claimed for up to forty years. The easily removable and mechanical assets like air conditioning units, furnishings and light fittings are depreciated based upon the unique effective life for each asset.
When you claim depreciation on your rental property it’s a deduction on your annual taxable income. This means it reduces your taxable income, resulting in you paying less tax and boosting your cash return.
Why an investor wouldn’t claim depreciation
There are two key reasons for this.
1. Eligibility for depreciation
The first reason is that sometimes, claiming depreciation simply isn’t worthwhile. This could be the case if, for example, you purchased a second-hand property in 2019 that was constructed before 1987 and hadn’t undergone any form of renovation or improvement. In this scenario, you couldn’t claim depreciation on the previously-used plant and equipment assets and no capital works would be eligible.
However, this would change if you purchased new assets for the property or if you or any previous owner made any improvements to it. In this case, it’s always recommended to contact a specialist quantity surveyor so that they can reassess and provide a depreciation estimate.
If you are ever unsure whether claiming depreciation on your investment property would be worthwhile, BMT can provide an obligation-free estimate. Each BMT schedule is also backed by the BMT Guarantee, which guarantees there will be no charge if BMT can’t find more than double their fee in first full financial year deductions.
2. Depreciation and Capital Gains Tax (CGT)
The second source is myths surrounding depreciation is concerning CGT. The amount of CGT you pay is based on the property’s cost base, and what you sold it for. When the sale price is more than the cost base, you make a capital gain and may result in a CGT liability.
Claiming depreciation reduces your property’s cost base, which can make it seem counterintuitive, but this isn’t the case.
The cash flow depreciation supplies throughout the property’s investment lifecycle far outweighs the potential affect it has on CGT. It’s also important to remember that CGT is based on your individual tax rate, so it doesn’t necessarily mean $1 in depreciation claimed is an additional $1 in CGT.
Discounts and exemptions will usually always further reduce the CGT payable. If you owned the property for more than 12 months, you can be automatically eligible to a CGT discount of 50 per cent. If you lived in the property within the past six years you could also be entitled to a full CGT exemption. In most cases, the depreciation deductions are available in full, however CGT liabilities are reduced due to the variety of exemptions available to property investors. Your accountant can advise further on what you may be eligible for.
I don’t claim depreciation on my rental property but want to start, is it too late?
Firstly, it’s never too late to claim depreciation.
If you have owned your rental property for several years and haven’t claimed depreciation, you can still claim these missed dollars back. A tax depreciation schedule prepared by a specialist quantity surveyor will allow you to do this by providing a history of deductions for previous tax returns.
On average, BMT Tax Depreciation find almost $9,000 in first full financial year depreciation deductions. BMT’s team know what to look for and how to apply relevant legislation to ensure you claim the most deductions possible.
Order your BMT Tax Depreciation Schedule today and Request a Quote or call the team on 1300 728 726.