The nature of any building is that it wears out or depreciates over a given period of time. It’s, however, important to note that this depreciation happens to buildings and assets but not to the land on which the structures sit.
In some jurisdictions, such as Australia, some arrangements allow tax reliefs as property depreciates. It’s quite helpful and one of the largest tax deduction formulas for property investors. However, it’s important to learn a few things about tax depreciation in order to benefit from this arrangement. What exactly is it and how does it work? Let’s find out.
It’s not about the structure depreciating.
The kind of depreciation we are looking at is not necessarily physical. In fact, a property may remain perfectly in good shape but still attract a rental depreciation cost. In other words, as the building ages, owners get to benefit from a tax deduction that they can take advantage of.
This deduction can be claimed for both the structure as well as the items that are permanently fixed to the property. This means other assets such as kitchen fixtures, dishwashers, carpets and so can still attract a deduction. This applies to the Sunshine Coast tax depreciation schedule and many other jurisdictions. It’s however important that you check out the laws in your area.
The Age of the Property
For buildings constructed after July 1985, owners can claim a Building allowance as well as Plant and Equipment deduction. Buildings constructed before this date attract only a Plant and Equipment depreciation. This is still worth pursuing as it may run in a substantial amount in the long run.
Preparing the Property Depreciation Report
The Australian Taxation Office (ATO) provides that quantity surveyors are qualified to make construction cost estimates in situations where these costs are unknown. In particular, for a residential property built after 1985, your account cannot estimate the cost of construction. Real estate agents, as well as valuers and solicitors, are also forbidden from estimating the construction of such properties.
The general understanding is that property depreciation requires a good measure of technical knowledge that can only be offered by a specialist. In this regard, a quantity surveyor is better positioned than a general accountant.
If there has been a renovation on the property, you also need to know how much you spent on the renovations. This is a requirement by the ATO. Where the cost of renovation is unknown, a quantity surveyor can be involved.
Will the property Need a Physical Visit?
Site visits by inspectors may be essential to satisfy the requirements of the Australian Taxation Office accurately. Such arrangements can be made between quantity surveyors and tenants or property managers in order to ensure a smooth process with little interruption to tenants.
How much does a tax depreciation schedule cost?
The cost of the depreciation schedule depends on a number of factors such as the size and the location of your property. Most quantity surveyors will give you great value for the money spent. It’s absolutely worth investing in the report by listing the services of a qualified professional.
When Doses depreciation start?
An asset starts to decline in value as soon as it is first used or installed. This means that you will make your tax deductions as soon it gains a taxable purpose.
How About Business on Rental Property?
The underlying question is whether letting out a property to tenants amount to investment rather than a business. However, to accurately determine this, an assessment has to be done in order to distinguish between a business that should be taxable and an investment for which you can claim depreciation. According to the Australian Taxation Authority, there is no single indicator to help make a decision on this, but a number of factors have to be put into perspective. They include:
● The total number of all residential units rented out on this property
● The average time/ number of hours you directly spend managing the rental properties
● The skills and even expertise exercised in carrying out the management activities
● Whether there are any professional records kept and maintained as would be in a business.
How are deductions calculated?
There two ways to work out the decline in value of a property;
● The diminishing value method
● Prime cost method
The diminishing value method: Using this method, the decline in value every year is calculated as a constant proportion of the remaining value of the property. For this reason, the value you can claim is higher during the early years of the property’s life
Using the prime cost method, the decline is calculated each year remains uniform to the original value of the property. Therefore, the claim is lower but constant each year.
Organizing the rental property depreciation schedule may turn out to be a technical affair for some investors. It’s advisable to seek the services of a professional and even conduct the ATO. This notwithstanding, there are several benefits that come with and eligible persons should property owners should make an effort to familiarize and reap the benefits of this arrangement.