Maximising Tax Benefits: Understanding Depreciation on Investment Properties
As tax season rolls around, it's crucial for property investors to grasp the concept of depreciation and how it can significantly impact their annual returns. By harnessing the power of depreciation on investment properties, you can increase your financial gains and reduce expenses.
Join us as we delve into the world of investment property depreciation and discover how it can work to your advantage.
Investment property depreciation: A brief overview
Investment property depreciation refers to a tax deduction that accounts for the decrease in the value of your property, ultimately influencing your net tax return. There are two primary areas where you can claim tax deductions related to depreciation:
Building structure: This accounts for the decline in the value of the physical building and its permanent fixtures.
Plant and equipment assets: This category encompasses the decline in the value of impermanent fixtures, such as ovens, dishwashers, air conditioning units, curtains, and carpets.
Unveiling the process of claiming depreciation on investment properties
To ensure you maximise your tax deductions related to depreciation, it is advisable to engage the services of a quantity surveyor. These professionals will create a tax depreciation schedule that outlines all the depreciable assets within your property, along with their respective annual depreciation values.
While there may be an initial cost associated with preparing a depreciation schedule, the long-term benefits of maximising your deductions and reducing your tax bill make it a worthwhile investment.
What qualifies for an investment property depreciation deduction?
The items and expenses that can be claimed for depreciation fall into three general categories: new assets, substantial renovations, and second-hand depreciating assets.
New assets: These are fixtures that you have recently added to your investment property, such as reverse cycle air conditioning units, dishwashers, blinds, and smoke alarms.
Substantial renovations: This category includes expenses related to the replacement of foundational and external walls, floors, roofing, or staircases.
Second-hand depreciating assets: For properties settled before 10 May 2017, you can still claim depreciation on items such as kitchen appliances and lighting fixtures.
Depreciation and its long-term impact on your finances
The depreciation of your investment property can have a substantial effect on your overall tax return. It's important to establish a depreciation schedule as soon as your property settles. However, if you haven't done so yet, it can be backdated for up to two years. Once you have your depreciation schedule in place, it's crucial to keep it updated with any new fixtures or renovations to ensure you continue to maximise your deductions.
By diligently managing depreciation over time, you can significantly increase your total return while simultaneously reducing your expenses. If you haven't already set up a depreciation schedule, we recommend reaching out to your accountant and a qualified quantity surveyor to explore this valuable opportunity.
Take charge of your tax returns and unlock the full potential of depreciation on your investment properties. Remember, every little bit adds up, and by understanding the intricacies of depreciation, you can make a positive impact on your financial future. Get in touch with us for more information.