Data reported by the Australian Taxation Office has revealed that property depreciation is the highest non-cash deductionclaimed by investors.
However, myths surrounding depreciation have some investors asking: ‘what happens if I don’tclaim 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 depreciatedbased 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 itreduces 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 constructedbefore 1987and 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, thiswouldchange 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 andCapital 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 mayresult 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 exemptionswill usually always further reduce the CGT payable. If you owned the property for more than 12 months, you canbe 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 byproviding a history of deductions forprevious 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.
As a seasoned expert in property investment and taxation, I bring a wealth of knowledge and practical experience to shed light on the concepts discussed in the provided article dated December 23, 2020. My extensive understanding of tax regulations, depreciation, and investment strategies allows me to provide insightful analysis and guidance in the realm of property ownership and financial management.
The article delves into the significance of property depreciation as the highest non-cash deduction claimed by investors, according to data from the Australian Taxation Office. Let's break down the key concepts discussed in the article:
1. Depreciation:
- Definition: Depreciation is the natural wear and tear of a property and its assets over time. It applies to income-producing assets, such as rental properties, and includes both structural components (e.g., walls, roofing) and removable assets (e.g., air conditioning units, furnishings).
- Duration: Structural components can be claimed for up to forty years, while removable assets are depreciated based on their unique effective life.
- Financial Impact: Claiming depreciation on a rental property results in a deduction on the annual taxable income. This reduces taxable income, leading to lower taxes and an increased cash return for the investor.
2. Reasons an Investor Wouldn't Claim Depreciation:
- Eligibility: Some properties may not be eligible for depreciation claims, especially if they are second-hand, constructed before 1987, and have undergone no renovations or improvements.
- Depreciation and Capital Gains Tax (CGT): There's a misconception that claiming depreciation increases CGT liabilities. However, the article clarifies that the benefits of cash flow depreciation usually outweigh any potential impact on CGT. Discounts and exemptions further reduce CGT liabilities.
3. Initiating Depreciation Claims:
- Never Too Late: The article emphasizes that it's never too late to start claiming depreciation on a rental property. Even if an investor hasn't claimed depreciation for several years, a specialist quantity surveyor can prepare a tax depreciation schedule, allowing for the retroactive claiming of missed deductions.
4. BMT Tax Depreciation:
- Services: The article mentions BMT as a resource for investors, offering obligation-free estimates and tax depreciation schedules prepared by specialist quantity surveyors.
- Guarantee: BMT provides a guarantee that there will be no charge if they can't find more than double their fee in first full financial year deductions.
5. CGT Considerations:
- Depreciation and CGT: While claiming depreciation reduces a property's cost base, the article clarifies that the impact on CGT is often mitigated by discounts and exemptions available to property investors.
In summary, the article underscores the importance of understanding and claiming depreciation for rental properties, dispelling myths and highlighting the potential financial benefits for investors. It provides practical advice on eligibility, CGT considerations, and the opportunity to retroactively claim missed depreciation. BMT is presented as a reliable partner for investors seeking expert guidance in navigating the complexities of property depreciation and taxation.
