Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 203

Tax deductions are still available for property investors

When looking to purchase an investment property, most buyers consider location, purchase price and tenanting ability, while depreciation is often overlooked. Depreciation can unlock the cash flow potential within an investment property, often resulting in thousands of additional dollars for the investor each financial year.

Announcements made in the 2017 Federal Budget may change some of the eligibility for depreciation, but investors should not overlook where it remains available.

What is depreciation?

As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction by any property owner who obtains income from their property.

Capital works deductions are based on the historical cost of the building excluding the cost of all ‘plant’ and non-eligible items. As a general rule, residential buildings which commenced construction after 15 September 1987 and commercial properties after 20 July 1982 are eligible for the capital works allowance.

Although these time restrictions apply, older properties have often undergone renovations. Renovations completed within the legislated dates can also entitle the owner of the investment property to deductions, even if the renovations were completed by a previous owner.

Common depreciable items in an investment property

Plant and equipment items, commonly known as removable assets, are also eligible for depreciation deductions (but see comment on 2017 Budget later). Each plant and equipment item has an effective life set by the ATO which determines the deduction.

Some plant and equipment depreciable items commonly found within a property include hot water systems, dishwashers, carpets, blinds and curtains, light shades, ovens, furniture, range hoods, smoke alarms and cook tops.

Case study

An investor has purchased a property for $420,000 and is receiving $490 per week in rent for a total income of $25,480 per annum. The estimated expenses for the property include interest, rates and management fees, which total $32,000 per annum. The following scenario shows the investor’s cash flow with and without depreciation. A typical $420,000 unit will show a total deduction of $11,500 in the first full financial year.

In this example, the investor uses property depreciation to go from a negative cash flow, paying out $79 per week, to a positive cash flow scenario, earning $3 per week, saving $4,255 for the year.

Claiming depreciation during renovation

When old assets like carpet or hot water systems are replaced during a renovation, the owners may be entitled to claim any residual depreciation as a tax deduction. Property owners should consider a pre-renovation depreciation schedule and update an existing tax depreciation schedule after work is completed to ensure they capture deductions for any new items added during the renovation.

Changes in the 2017 Federal Budget

Under proposed changes, investors who exchange contracts on a second hand residential property after 7:30pm on 9 May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchase a new property will be able to continue to claim these items as previously.

We are currently speaking with government to further understand the intricacies relating to the proposed changes.

Claim property depreciation this financial year

To maximise cash flow, investors should engage a specialised Quantity Surveyor to complete a tax depreciation schedule. The fee for a tax depreciation schedule is 100% tax deductible. The schedule will show deductions for the life of the property (40 years) and will ensure the property owner improves the return on their investment.

 

Bradley Beer is the Chief Executive Officer of BMT Tax Depreciation, a leading provider of tax depreciation schedules for investors. This article is general information and individuals should seek their own tax advice.

RELATED ARTICLES

Maximising your property tax depreciation and claims

EOFY and new depreciation rules for property

What tax deductions are available to property investors?

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Shares

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Retirement

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Estate planning made simple, Part I

Every year, millions of dollars are spent on legal fees, and thousands of hours are wasted on family disputes - all because of poor estate planning. Here's a guide to a key part of estate planning - making an effective will.

Investment strategies

Markets are about to get a whole lot harder

As the world shifts away from one of artificially suppressed interest rates and cheap manufacturing, investors will need to carefully consider how companies are positioned to navigate the new higher-cost paradigm.

Investment strategies

Why commodities deserve a place in portfolios

2024 looks set to be another year of reflation and geopolitical uncertainty — with the latter significantly raising the tail risk of a return to problematic inflation. That’s a supportive backdrop for commodities.

Property

What’s next for Australian commercial real estate?

It's no secret that Australian commercial property has endured its most challenging period since the GFC. Yet, there are encouraging signs that the worst may be over and industry returns should improve in the medium term.

Shares

Board games: two hidden risks for stock pickers?

Allan Gray's Simon Mawhinney thinks two groups with huge influence over our public companies often fall short of helping shareholders. In this interview, Mawhinney also talks boards, takeovers, and active investing.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.