Learn how an apartment depreciation schedule will save you money.
Real estate is one of the most popular and most secure investment strategies. Right now, Australia’s housing market is experiencing a surge.
If you haven’t gotten into real estate investment, it’s time to start. Real estate has far less volatility than the stock market. In addition, it offers much better tax breaks.
As a property investor, you are entitled to several tax benefits. But many investors aren’t aware of the tax benefits of depreciation. Do you know how an apartment building depreciation schedule works?
If not, it’s time to learn. We’ve broken it down for you to make it as simple as possible to determine what annual depreciation expenses you can and cannot claim on your taxes.
What Is an Apartment Depreciation Schedule?
The Australian Taxation Office, ATO, permits the owners of income-producing properties to claim the building’s depreciation as a tax deduction. Tax Law Depreciation refers to how aspects of a building wear out with time and use.
To claim rental property depreciation, you will need to have your property inspected to receive a depreciation report. This is also known as a depreciation schedule.
A property depreciation schedule outlines all tax depreciation deductions available for a residential rental property or a commercial building.
What Are the Benefits of Claiming Depreciation?
On a separate note, you cannot claim depreciation on land. This is because the land is not considered able to be used up. Therefore you cannot depreciate costs related to clearing, planting, or landscaping.
If you own an investment property, you will benefit from claiming depreciation deductions because it can increase your cash flow from that property.
Getting a property tax depreciation schedule and understanding your property’s building depreciation rate will ensure you can maximise your income and reduce your taxable income each year.
What Depreciation Expenses Can You Claim?
The Australian Taxation Office permits owners of rental properties to claim depreciation of both old and new apartments.
The two categories under which you can claim depreciation of apartment building assets are capital works and capital allowances.
Capital Works Depreciation Expenses
The capital works assets of your investment property include things that are fixed to the rental property. These include building renovations and extensions, such as adding a garage to your rental property.
Any building alterations you make to the structure, such as adding or removing interior walls, are also depreciation expenses. You can also claim structural improvements, like adding a driveway or retaining wall.
You can claim capital works deductions for a rental property when it’s constructed after 15 September 1987.
What is the apartment depreciation rate?
In addition, the depreciation expenses you claim must be distributed over the course of 40 years at a rate of 2.5 per cent each year. This is for the capital works component, known as the apartment depreciation rate.
Plant and Equipment Depreciation Expenses
Plant and Equipment assets are typically standalone assets that are not permanently attached to the rental property or easily removed.
These assets can include items such as air conditioners, carpets, blinds, hot water heaters. It also includes smoke alarms and overhead ceiling fans. Each plant and equipment asset has its own specific life and appreciation rate.
You can find out the estimated useful life of a range of plant and equipment assets on this table provided by the ATO. To calculate the amount of depreciation you can claim, you can use either of two methods.
The first method is the prime cost method, the asset’s depreciation gets spread out evenly throughout its effective life.
The second method is the diminishing cost method. With this method, the yearly depreciation gets calculated based on the diminished value of the asset for each year of its functional life.
In this second method, the tax deduction you receive for depreciation is higher in the first years of the asset’s life. In the first method, the tax deduction for depreciation is spread evenly over the asset’s life.
What Depreciation Expenses You Can’t Claim
As of 1 July 2017, investment property owners can no longer claim depreciation on investment property assets purchased second-hand.
That includes assets purchased while living in and/or renovating your rental property. It is best to buy new plant and equipment assets for the duration your property is available for rent or rented out to a tenant.
If your rental property is part of an investment property business you operate, you are exempt from this rule.
Likewise, if you are a private investor, you can claim depreciation on second-hand assets purchased and installed before 9 May 2017 based upon the purchase price.
When Does Depreciation Work Or Begin?
Depreciation begins as soon as your rental property goes into service. In-service means that the rental property is ready and available to rent.
Say you list your property for rent on 1 September. You can claim depreciation as of the date it became available in September. But, a tenant does not sign a lease until November.
Depreciation continues until you deduct the entire property cost or retire the property from service.
How to Record Your Depreciation Expenses
You must keep expense records of your capital works assets over the entire course of the 40 years of eligibility. You will want to include the details regarding any construction work done.
For each construction project, you need to include the date the work began, the date the work was completed, and the total cost of the project.
Make sure to keep all your rental property depreciation expense records for the entire asset life. To be safe, keep the records for an additional five years after you’ve filed your income tax return.
How much does an apartment depreciation report cost?
With the recent changes to the depreciation laws, the depreciation cost can vary according to many factors, namely:
- Whether your property needs a physical inspection. Not all properties now need an inspection.
- The size of the apartment may have some influence on the pricing.
- The amount of renovation or inclusions you have added can influence the pricing.
In general, you should be paying somewhere from $440 to $715 and no more. The most important takeaway is to have your property assessed for the requirement of the inspection.
How can I work out how much depreciation I can claim?
The best way to work out depreciation on apartments is to use the Apartment Depreciation Calculator.
It’s free to use and will quickly estimate how much you can claim on your apartment. To claim the depreciation, though, you will need to have a prepared by one of our quantity surveyors.
Apartment Building Depreciation Schedule Takeaways
Maximise your income and get the most out of your real estate tax deductions. Find out the building depreciation rate for your investment property.
As a real estate investor, you don’t want to miss out on a single tax break. Claiming depreciation on your tax return can make a significant difference. It will reduce your income tax payable and offset some of the rental income you need to declare.
You don’t have to wait to find out your apartment building depreciation schedule from an inspector. Get an apartment depreciation quote immediately from Washington Brown.