Back-to-basics on Property Depreciation

How does investment property depreciation work?

Holiday Home Depreciation AirBnb

What is depreciation?

Let’s start right at the beginning. Depreciation is basically a tax deduction available to property investors. Your investment Depreciation Quote Scheduleproperty earns an income (in the form of rent from your tenants). So, as with any activity that produces an income, there are various tax deductions available to you.

Normally these tax deductions are things you’ve spent money on, such as property management fees, council rates and other miscellaneous items. You pay an amount of money, you receive a tax invoice and receipt, and you use that piece of paper to claim a tax deduction when tax time rolls around.

Property depreciation

However, property depreciation is what the tax office calls a ‘non-cash deduction’. This means you don’t physically fork out cash in order to claim a deduction. I have also heard it referred to as ‘on paper deductions’ for the same reason. Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time.

This tax deduction recognises the fact that the building itself will become worn out over time and eventually need to be replaced. This also includes its plant and equipment; for example, air-conditioners, blinds, and carpet, etc. It doesn’t matter that these items were paid for by someone else – a developer or previous owner – you, the current owner, can continue to claim deductions as they continue to depreciate in value.

(Note: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

As with any tax deduction, depreciation basically reduces your taxable income. So if your income was $100,000 for the year, and you claim $10,000 worth of deductions, you only pay tax on $90,000. The table below shows you the difference depreciation can make to monthly returns from your property investment.

Of course, these calculations are for the purposes of illustration only. The exact amounts depend on the age of your property and various other variables. This is all covered in my book, CLAIM IT!

Depreciation Calculator

Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

Can I DIY my own Depreciation Report?

As an expert in the market I am baffled by the number of companies that offer do-it-yourself depreciation schedules. Not only are there some potential legal issues but, more importantly, you will be missing out on deductions.

The Issue with DIY Depreciation

The DIY depreciation option generally gives you a tick sheet and asks you to take your own measurements of rooms and other parts of the property.

DIY depreciationNow, let’s say you measure from one bedroom wall to the other. If you do that all around the house you could reduce the property by 10% in gross area. At around $1,500 per square metre to build, you would have missed out on something like $15,000 worth of tax deductions.

When a client comes to us needing a depreciation report, we will send out a quantity surveyor to do a thorough site inspection. This involves a measurement of all the rooms and areas in the property (allowing for wall widths and other anomalies) and all the plant and equipment items including carpets, blinds, ovens and air conditioners.

It is a thorough process and you should use technically qualified people to do it.

The Australian Institute of Quantity Surveyors’ (AIQS) Code of Practice also stipulates that site inspections are necessary to satisfy ATO requirements. This guarantees you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit.

Depreciation CalculatorThe AIQS also points out that those property owners who attempt to estimate their own depreciation, or use non quantity surveying qualified people, risk submitting an incomplete or poor depreciation report, which could be a double whammy. It could not only cost them in missed deductions but could also possibly attract an audit by the ATO if their report is not up to the standard required.

Work out how much you save using our free property depreciation calculator or make it happen and get a free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

What is Building Consultancy?

Building Consultancy

Building consultancy services help investors and developers recognise, maintain and increase their property’s value, while helping to minimise their risk. Building consultancy services include:

A good quantity surveying firm will also advise on all matters relating to property development and occupation in conjunction with other in-house teams and client-appointed consultants.

CASE STUDY

Property Type: Healthcare Clinic
Location: North Sydney
Service: Capital Expenditure Plan (CAPEX)

A private hospital contracted Washington Brown to undertake a 15-year Capital Expenditure Plan (CAPEX) of their newly-built specialist clinic and research and development facilities. The private hospital had leased the building to numerous medical consultants via a Service Level Agreement and was pro-active enough to ensure that the building would be maintained in the future by working out the cost of future maintenance and thus charging the tenants a nominal amount yearly. Depreciation Quote Schedule

Washington Brown reviewed the entire asset which included the building fabric, building structure and all the services within the six storey (including a two-storey below ground car park) building. We took into account the high usage areas, life span of components, potential problematic areas, general wear and tear, etc., to create a year-by-year spreadsheet, together with a summary page of all capital expenditure costs and a total cost over the 15-year period.

This allowed our client to determine the service charge levy that they should be charging each tenant, depending on the size of their tenancy. By providing a copy of our report to the tenants, our client could demonstrate the future capital works that were planned and the costs attached to these works.

The report reassured our client that there would be sufficient funds to maintain the building to its current high standard of finish, and ensure the electrical and mechanical services would be functioning as intended. The tenants were also reassured that the landlord would be maintaining the building and that there would not be any demands for high costs from their landlord in the future.

If you require a building consultant – please visit our building consultancy page.

This blog is an extract from CLAIM IT! – grab your copy now!

Schedule of Condition Report

Schedule of Condition Report

A schedule of condition Report details the existing condition of a building at a specific point in time, which is usually used when leasing, purchasing or updating property assets or when there is a change of ownership.

It is an item-by-item account describing the elements of the building and their condition and it is recorded in a written report with photographic evidence.

Schedule of condition reports are particularly important to commercial and industrial tenants as usually commercial and industrial leases will stipulate that the tenant is responsible for repairs at the end of the lease. Depreciation Quote Schedule

A schedule of condition report, signed and incorporated into the lease prior to signature, will help to reduce your legal liabilities and minimise make good risk at lease termination.

The main purpose of a schedule of condition is to:

CASE STUDY

Property Type: Industrial/ Storage
Property Size: 4,000m2
Location: Western Sydney

Depreciation Calculator A private landlord contracted Washington Brown to undertake an ingoing schedule of condition of an existing industrial and storage facility located in Western Sydney.

The client required a professional ingoing schedule of condition be carried out prior to him signing the lease, to record the existing condition of the building. It would then form part of the lease agreement and be used in the make good at lease termination, in the event of any dispute. The inspection was carried out within five days of us receiving instructions and the report was issued within the client’s timeframe of five days.

In consultation with the client, we identified their requirements and the extent of the schedule of condition. We did a thorough internal and external inspection of the premises and identified all existing defects/damages within the building. Then we produced a detailed report which outlined the element description and condition of the building. The report also included photographs to identify and support the issues raised.

The client was very satisfied with our reports and findings. They were able to negotiate that our report be included in the lease agreement, therefore minimising their risk in case of any dispute.
Our independent assessment gave the client a solid foundation and the peace of mind that in the event of any future dispute, they have a legally-sound document that will make the settlement quicker.

Learn more about a schedule of condition report here.

A Good Look at Property Depreciation Schedules

a quantity surveyor preparing Depreciation Schedules for a home

What is a property depreciation schedule?

Property depreciation schedules refer to an accounting process used to calculate the value left in any given property or equipment. These are procedures that any property investor should look into if you seek to maximise the return of your property at the end of each financial year. You’ve may wonder – how does it actually work though and how can you benefit from a so called property depreciation schedule?

Preparing an investment property depreciation schedule

Now matters regarding an investment property depreciation schedule are handled by specialists known as quantity surveyors. These professionals complete the necessary reports covering two important things: Depreciation Calculator

(NOTE: Deductions for plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Capital works refer to the “building write-off”; tax deduction benefits that you can claim based on the structural condition of the property itself and the permanent assets contained within. Owners of a property built after 1987 are eligible for such a tax deduction which can be as high as 2.5 percent based on the age of the property in question. Plant and Equipment on the other hand pertain to tax deductions for all removable assets found within the property as these items have limited service life and naturally decrease in value over time.

Depreciation Quote Schedule

How much of a tax benefit can you expect from property depreciation schedules?

Well that depends – what type of property do you have, the age of the property and its manner of use. Properties, whether residential or commercial, are eligible for claim depreciation which is surely of great help to an investor come tax time.

Obtaining the maximum tax benefit from an investment property depreciation schedule requires extensive knowledge and skills in areas dealing with construction costs and the applicable tax legislation’s. To this end, you’d want to consult with a qualified quantity surveyor who can help you prepare a depreciation schedule to better secure your interest at the end of the financial year.

Looking to get started with some of the best quantity surveyors in the country? You can expect nothing less out of Washington Brown! Call us today on 1300 990 612 and arrange a consultation with a skilled and highly reputable expert when it comes to property depreciation schedules.