Depreciation and Natural Disasters: Everything You Need To Know
A natural disaster could have a devastating effect on your investment property in Australia. You may need to get a new depreciation schedule to account for any repairs you make. Here’s what you need to know.
You cannot underestimate the effects natural disasters can have on an investment property. Australia deals with such disasters, and other issues, on a near-yearly basis. If such an issue affects your property, you may have to undergo a period of rebuilding. You’ll need to replace any assets you’ve lost, and possibly renovate or rebuild parts of your investment property in Australia.
This could make you wonder how natural disasters affect your rental property depreciation rates. On the one hand, you may have to pay out of pocket to bring your property back up to code. After all, your insurance policy may not cover unforeseen circumstances. On the other hand, any improvements you make to the property improve its value. Your construction work could allow you to make more tax deductions. Australia has various regulations that ensure full compliance in such situations.
There are three situations you may find yourself in following a natural disaster. You’ll usually have to do at least one of the following:
Repair any damaged assets
Replace damaged assets that you cannot repair
Improve or upgrade an asset in the wake of the disaster
You must approach each situation differently to maximise your ability to claim depreciation. Let’s look at each individually.
Repairing Your Assets
Repairing an asset involves any work you undertake to bring the asset back to its original condition. This generally includes minor work only.
If you make any improvements to the asset, you cannot claim it as a repair. This includes any physical changes to its appearance, or altering the asset’s functionality. These are upgrades, and you must treat them as such.
So, what can you claim for when repairing an asset? It differs depending on whether you have insurance.
If you have insurance, you can claim for the cost of repairing the asset. However, you must also declare any sum you received from your insurance policy. This will have a direct effect on your tax deductions. Australia does not allow you to claim the full cost of the repair if you have insurance.
However, those without insurance can claim the full cost. This is because you won’t have received any help in making the repair.
Replacing Your Assets
On the face of it, replacing an asset seems simple. If you can’t repair your previous asset, you must purchase a replacement. You can then claim for this replacement on your tax returns.
However, the issue of improvement comes into play again. The asset you purchase must have the same specifications and functionality as the damaged asset. Any improvements move the asset into the final category, which changes how you claim for it. Simply put, if the replacement isn’t like-for-like, it’s an improvement.
If you have insurance, you have to make several adjustments to your depreciation report. You have to account for both Capital Allowance, and Individual Depreciable Assets.
Those without insurance must scrap the depreciation value of the previous asset. Replace this with the new forecast for the replacement asset.
Making Improvements or Upgrades
Anything that improves the original asset is either an improvement or an upgrade. This includes changes to appearance and functionality. You may also have to claim on the asset as an upgrade if it has different specifications to the original asset.
So, how do you handle the depreciation? If you have insurance, you take the same action as you would when replacing an asset. Adjust your depreciation report to account for the Capital Allowance. Don’t forget the Individual Depreciable Assets either.
If you haven’t got insurance, you must get arrange a new depreciation forecast for your improved asset.
Working with a Quantity Surveyor
In all cases, work with a Quantity Surveyor to make your adjustments. These professionals will help you to forecast your depreciation tax deductions. Australia is home to many Quantity Surveyors, so do some research before selecting somebody.
The role your Quality Surveyor plays depends on your previous actions. If you had your property assessed before the disaster, your surveyor will make minor adjustments to your previous report. This costs less than a full report.
However, you will need a full depreciation report if you didn’t already have one. This takes some more time and money. However, the report will ensure that you claim all the depreciation you’re eligible for.
The Final Word
A Quantity Surveyor can help you to maximise your depreciation claims after a natural disaster. Arrange a survey as soon as possible to ensure you don’t lose more money than you have to.
Washington Brown maintains a team of expert Quantity Surveyors. Contact us today to find out more.
You Can Claim Tax Deductions in Australia for Previous Renovations
When considering tax deductions in Australia, most investors only take their own renovations into account. It does make sense. After all, why should you be eligible to claim deductions on your investment property in Australia if you didn’t pay for the work?
Perhaps surprisingly, you can claim deductions for the previous owner’s renovations. However, there are several things you need to consider. For example, how much you can claim depends on when you purchased the property. The effects of the 2017 Budget play a role here, as what you can claim differs depending on if you made your purchase before or after the budget. Let’s look at what tax deductions in Australia you can claim in both scenarios.
You Bought Before the 2017 Budget
Things are simpler if you bought the property before the 2017 Budget. If this is the case, you can make claims under both Division 43 and Division 40 of the Income Tax Assessment Act (ITAA).
Division 43 relates to any capital works that the previous owner undertook on the property. This includes any renovations, such as the building of some extensions or remodelling a bathroom or kitchen. It also covers any work done to the building’s structure. For example, you’d be able to claim for a new roof or for some of the walls that the previous owner built.
Division 40 relates to the equipment installed in the property. Your investment property in Australia may have an air conditioning unit or some other piece of equipment that the previous owner installed. If that’s the case, you should be able to claim for it.
The only real barrier is that you may not know the completion date for the work or the cost. Not all sellers will provide you with this information. If that’s the case, you need to employ the services of a quantity surveyor. Your surveyor will provide you with a cost estimate, which you can use when claiming tax deductions in Australia. The Australian Taxation Office (ATO) does not accept estimates from other professionals. For example, you can’t get an estimate from your accountant for the work. It has to come from a quantity surveyor.
You Bought After the 2017 Budget
This is where things get more complicated. You have to consider the extent of the renovation work, as well as whether any was carried out in the first place.
The new budget introduced the term “new residential premises” into the equation. To understand what this phrase means, we need to look at the Goods and Services Tax (GST) Act.
What Does the GST Act Say
You’ll find references to “new residential premises” in sections 40 to 75 in the GST Act. Generally, such a premises is one that has not been rented out or sold as a residential home before your purchase. This won’t usually present a problem. After all, that language basically covers new properties.
However, there’s more. The Act also defines these premises as those that have undergone “substantial renovation” work. The GST Act also provides a description for “substantial renovations”. They are any renovations through which the entire building has either been replaced or removed. As a result, the installation of a new bathroom is not considered as a substantial renovation on its own.
What Does This Mean for Me?
If your investment property in Australia does not fall into the substantial renovations category, you may not be able to claim the same deductions that you could on a property built before the 2017 Budget. In particular, you won’t be able to claim Division 40 depreciation. New equipment on its own is not enough to constitute a substantial renovation.
However, this changes if the building has undergone enough renovation to become a “new residential premises”. In such cases, you can claim for both Division 43 and Division 40 work.
You’ll need the help of a quantity surveyor to work out the extent of the work undertaken on your building. Your surveyor will create a timeline for the building. This will estimate the work carried out, its cost and its extent. You can use this information to figure out if your building falls into the “new residential premises” category.
Don’t fret if it doesn’t. You can still claim for Division 43 work. Your quantity surveyor will be able to provide more exact information detailing exactly what you can claim for.
You’ll need the services of a quantity surveyor, regardless of when your property was built. They will be able to tell you what previous renovations you can claim for.
We can help you if you’re looking for a quantity surveyor. Contact us today to maximise the depreciation on your property’s previous owner’s renovations.
Myth 1: The Commissioner’s effective life ruling must be used for all assets, no exceptions.
Truth: The Commissioner of Taxation’s ruling only applies to new depreciable assets.
In 2015, the commissioner wrote in the ruling that the effective life for new internal window blinds is 10 years. He does not mention that the effective life for second hand internal window blinds is 10 years also. So, if you have purchased a 5-year-old building with 5-year-old internal window blinds, you are not able to depreciate the blinds using a 10-year effective life.
A quantity surveyors role is to maximise depreciation deductions for the client. In order to do this, they must assess the effective life of second hand assets. And not just assume all of the assets in the property are brand new assets.
Also, it is important to note that if an asset is not listed in the depreciation schedule, it does not mean you are not able to claim for that asset. If it is a depreciable asset, you are able to claim it!
If an asset is purchased after the completion of the report, or you did not provide the information to the quantity surveyor, your accountant is able to include the asset for you.
Myth 2: If the assets in the property are destroyed I am able to claim the balance of the depreciation.
Truth: Some of this myth is partly true. The Division 43 capital works states that where a taxpayer’s capital works are destroyed, a deduction is permitted under the Undeducted Construction Expenditure rule.
However, if they receive an amount under a different insurance policy for the destruction of the assets, they are required by law to reduce the Undeducted Construction Expenditure by that amount.
Under Division 40, if a taxpayer ceases to own a depreciating asset (either sold or destroyed the item), or does not use a depreciating asset (no use for it any longer), a balancing adjustment will occur.
A balancing adjustment amount can be calculated by comparing the asset’s termination value (sale proceeds) and its adjustable value (written down value). If the termination value is greater, you include the excess in your assessable income. However, if the termination value is less, you deduct the difference.
Myth 3: Once the depreciable asset is found, you can claim depreciation on it.
Truth: Through past experiences, I have learnt that most investment home owners use their properties at some point during the year. This, however, creates incorrect figures in their tax depreciation schedule.
The purpose of a depreciation schedule is to inform a taxpayer on what they can include in their tax return. Without considering whether or not there has been private use of the property, or figuring out how to adjust the depreciation amounts to the correct sum, is at best misleading and at worse illegal.
Myth 4: All costs in acquiring a rental property should be able to be depreciated in one way or another.
Truth: This has mostly been covered by Myth 1 already. But this is the most common myth so I am going to explain it in more depth.
I have found that QSs are continually finding any asset to attach any and all costs to in order to claim a deduction, without properly following the laws.
For example, an investment property owner’s fence is damaged and the owner spends money on the repairs. The QS sees the cost the owner has spent and includes that whole sum in their depreciation schedule, depreciating it over 40 years at 2.5%. This is wrong.
A repair should be claimed at 100% in the year in which it was incurred.
Myth 5: Once I have spent money on a asset or a capital work I am able to claim it.
Truth: Under Division 40, you are only able to start depreciating an asset once it has been “used or installed ready for use”. Not as soon as you have paid for the asset.
For capital works under Division 43, you can claim deductions only once construction has been completed.
Myth 6: If I am unable to find the depreciable asset in the Commissioner’s yearly ruling, I cannot depreciate it.
Truth: The intention for the Comissioner’s ruling is to estimate the effective lives of assets. Not to decide what is a depreciable asset.
A depreciable asset is defined as an asset with a limited effective life. Therefore they are expected to decline in value over time.
Myth 7: Your assets are always deducted at 2.5%.
Truth: The rate at which assets are deducted is almost always 2.5%. However, there is one time you can get 4%.
However, there are times when a 4% deduction is applicable.
For example, a 4% rate will apply on an income-producing use of a building regarding an industrial manner.
Short-stay accommodation platforms such as AirBnB can be hugely beneficial to landlords.
A recent global study found that financially you’re much better off renting your property on Airbnb than in the traditional way with a permanent tenant.
The Nested.com 2017 Real Estate Return on Investment Index found a three-bedroom property in Sydney would take 80 months to pay off through Airbnb earnings compared to 315 months via traditional rental methods – around four times as long.
This put the city at 23 in world rankings for the amount of time it takes to pay off a property via Airbnb earnings. Perth, Melbourne and Brisbane came in at 25, 43 and 57 respectively. In these cities it was also significantly quicker to pay off your home by renting it on Airbnb.
There is some conjecture about the accuracy of this data since it looked across the whole market. We know that property location is important for short-term accommodation.
But it’s undeniable there are some very attractive returns on offer through Airbnb and other short-stay websites. So, it’s no surprise that investors are increasingly jumping on the bandwagon.
The problem though is that they’re not the only ones. Some tenants are also trying to profit by subletting their rental properties, creating significant problems for landlords.
Let’s look at what’s happening
Recently, there have been a few highly publicised cases of landlords discovering their opportunistic tenants are illegally subletting their properties on Airbnb.
These tenants, dubbed ‘ghost hosts’ are breaching their leases and often building bylaws.
Last year a Victorian landlord went to the Supreme Court seeking to evict her tenants after the Victorian Civil and Administrative Tribunal (VCAT) ruled she couldn’t kick them out for subletting her St Kilda property on Airbnb.
She won the right to evict them, and the VCAT ruling was overturned. The court found the tenants had breached their lease provisions.
In Sydney, another landlord discovered her tenants were subletting her one-bedroom rental property to up to four people at a time, for triple the rent.
When she contacted Airbnb asking them to take down the listing they reportedly informed her it was a matter between herself and her tenant.
This case didn’t go to court. However, the landlord did eventually get the tenant out of their property. Only after they repeatedly ignored her requests to refrain from subletting.
While these are just a few examples, it’s becoming increasingly common for tenants to sublet their properties on Airbnb and other accommodation-sharing platforms, putting more and more landlords at risk.
A simple Google search demonstrates just how many tenants are looking to do this without their landlord’s knowledge… There’s no shortage of people talking about it or offering advice to tenants looking to sublet their rental property.
Why is it a problem for landlords?
Landlords see property investments as low risk. You find a tenant who pays rent on time and takes care of the property, minimising wear and tear. You hold the property for the long term, usually for a modest return.
Now, if your tenant starts subletting the property on an accommodation-sharing platform the scenario changes entirely, with the investment becoming high risk.
You have people – complete strangers, and large numbers of them – staying in your property that haven’t been screened. So you have no idea who they are and whether they’re taking care of the property. While there are plenty of decent people using Airbnb and the like, we’ve all heard the nightmare stories of drugs and damage to rented properties.
To add insult to injury, your tenant wants to profit from this when they don’t even own the property. It is also likely they won’t be responsible if something happens.
It’s highly likely the insurance you have as a landlord will be voided due to subletting. If something happens to the property or one of the guests, you could be the one footing the entire bill. And then there is the extra wear and tear to consider.
How can you protect yourself?
It’s always wise to screen your tenants well to begin with. Then hopefully if you select a good one, you won’t have an issue.
You’ll also need to make sure your lease clearly prohibits subleasing and that the tenant understands this.
But if you suspect your tenant might be subletting your property, you need to investigate it straight away. And more importantly, put a stop to it.
The problem is that there’s no easy way to find out if your property is being sublet. If you do find out, it’s difficult to stop it as we’ve seen in these previous examples.
To discover it you need to be vigilant. Even more so if your property is in an area that’s in high demand for short-term accommodation. Regularly checking on Airbnb and other short-stay websites to see if your property is listed is a good way to keep tabs.
Since you can’t search for an address but only look at maps on Airbnb it’s also wise to become friendly with the neighbours so they can report any unusual activity to you.
You might also find some sites online that do the checking for you. In the US there’s one called SubletAlert.com that monitors Airbnb and other websites. I haven’t found one in Australia yet, but there’s bound to be one soon.
You should also conduct regular property inspections. Even drive past your property regularly if you live in the area, and look for anything suspicious.
If you discover a problem it’s likely a tenant can only be evicted after carrying out the usual processes if they’ve breached their lease.
If your tenant has come to you asking permission to sublet the property and for some reason you’ve decided you’ll allow it (perhaps they’re making it worth your while), you’ll need to make sure you and the tenant are covered with the appropriate insurances, and the building allows it.
Whenever I am delivering a presentation or conducting a webinar, I always make sure to leave time for a 30 min Q&A session at the end.
In most Q&A sessions, the topic that by-far receives the most queries has to do with the concept of “scrapping” in relation to property tax depreciation.
Claiming the Residual Value on items that are about to removed can significantly increase your tax depreciation deductions. The problem is that many investors who renovate miss out on this due to a lack of awareness.
It’s important to understand the basics of property depreciation before diving into the subject of scrapping so, let’s have a quick re-cap into what property depreciation is all about.
What is Property Depreciation?
Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
There are two types of depreciation allowances available: depreciation on Plant and Equipment Assets and the Capital Works deductions.
Depreciating Plant and Equipment Assets (Division 40) refers to items within the building like ovens, dishwashers, carpet & blinds etc.
(NOTE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – They’re values, however, can still be scrapped in full if removed or sold- Read about the Budget changes here).
Capital Works deductions (Division 43) refers to construction costs of the building itself, such as concrete and brickwork.
Whilst both of these costs can be offset against your assessable income, the property must be used for income-generating purposes. It is also important to note that to be eligible to claim on the Capital Works component, a residential property needs to have been built after the 18th of July 1985.
So what is scrapping and why is it a hot topic for property investors?
Put simply, scrapping is the ability to claim deductions on items within your investment property that you are about to throw away.
Engaging a qualified Quantity Surveying firm will ensure that you do not miss out on claiming any eligible residual value of these items as a depreciation deduction. This value can be claimed immediately in whole, once the items have been removed.
The reason it’s such a hot topic is due to the fact that these deductions can often add up to thousands of dollars.
There is one major caveat though. In order to claim the residual value on these items, your rental property must be producing an assessable income prior to the disposal.
There is no clear guideline on how long the property needs to be rented out for though, just that is was producing an assessable income.
There are two ways we can assess the scrapping allowances of an investment property.
Option 1 – Only depreciable assets can be scrapped
(This means the building was built before 1985 and no residual capital works deductions are available)
For Division 40 depreciable assets, if a taxpayer ceases to hold a depreciating asset (sold or destroyed) or ceases to use a depreciating asset (doesn’t need it anymore) a “balancing adjustment” will occur.
You work out the balancing adjustment amount by comparing the asset’s termination value (sales proceeds) and its adjustable value.
If the termination value is greater, you include the excess in your assessable income but if the termination value is less, you deduct the difference.
These deductions can add up quickly. Even if only in relation to depreciable assets.
Let’s crunch some numbers:
Joan Smith settles on a property for $650,000 on Oct 15 2015, the property had a long term tenant in place, who had agreed to stay for another 6 months. The property was 19.5 years old when she settled on it.
Washington Brown inspected the property on Oct 15 2015 and assigned the following values to the depreciable assets listed
Joan decides, voluntarily, to upgrade the apartment so that she can attract a higher quality tenant. At the end of the lease, when the tenant moved out, Joan replaced the items above.
Joan can claim the full depreciable amount of $4079 in her 2015/2016 tax return for these items that she is removing.
In addition, Joan has spent $8,555 replacing the items above, she can now start to claim these new items based upon their individual depreciation rate.
Option 2 – Depreciable Assets and & Capital Works deduction can be scrapped.
If you start moving walls or replacing kitchens in buildings built after 1987: your claim has the potential to be huge!
And let’s face it, it’s not that unusual to want to update a 20 year old kitchen.
Now let’s crunch the numbers on a situation where Joan renovated the kitchen and bathroom as well:
Capital Work item
Cost in 1995
Residual Value in 2015
Plumbing Bathroom & Kitchen
Electrical Bathroom & Kitchen
Tiling Kitchen & Bathroom
The items above have been depreciated at 2.5% per annum for 20 years. That equates to 50% left of the value that can be claimed as an immediate deduction when removed in 2016.
That’s the tidy sum of $15,816.00 as an immediate tax depreciation deduction!
One thing that needs to be considered when calculating the amount of deductions available, is whether you or another person was not allowed a deduction for capital works.
“It’s complicated” but here the method statement from the Income Tax Assessment ACT:
The amount of the balancing deduction
Step 1. Calculate the amount (if any) by which the * undeducted construction expenditure for the part of * your area that was destroyed exceeds the amounts you have received or have a right to receive for the destruction of that part.
Step 2. Reduce the amount at Step 1 if one or more of these happened to that part of * your area:
(a) Step 2 or 4 in section 43- 210, or Step 2 or 3 in section 43- 215, applied to you or another person for it;
(b) you were, or another person was, not allowed a deduction for it under this Division;
(c) a deduction for it was not allowed or was reduced (for you or another person) under former Division 10C or 10D of Part III of the Income Tax Assessment Act 1936 .
The reduction under this step must be reasonable.”
So in simple terms, you need to take into account any periods where Capital Works deductions could not be claimed and reduce that amount from any residual value left.
The last line is interesting, “The reduction under this step must be reasonable”.
I say interesting, because there are so many variables and not a lot of rulings to go by. But in my opinions here are some reasonable examples:
It would be reasonable to assume that if you purchased an industrial or commercial property, Capital Works deductions were available the whole time. So no allowance for non use would be required.
It would be reasonable to assume that if you purchased a serviced apartment, Capital Works deductions were available the whole time. So no allowance for non use would be required.
It would be reasonable to assume that if you purchased a unit in a ski resort, it was used, perhaps, for 2 weeks of the year for private use by the previous owner and you would need to factor that in.
It would be reasonable to assume that if you purchased a holiday house, in area where holiday lettings are common and that you saw the property listed on AIRBNB prior to your purchase and the holiday period was blocked out – then you should factor 2 weeks of private use per year into the equation.
Now the tricky one, you buy an average unit with a tenant in place. Who knows, it may have changed 5 times since it was new. I think it would be unreasonable for you to have to find out the full history of the unit. Privacy laws are very strict now, particularly in Victoria. So in that case, I would personally assume it was an investment property the whole time – but that’s me!!
One final thing you need to factor in, just to make life more complicated, is whether any amounts were received by way of insurance.
The termination value or residual value needs to include the amount received under an insurance policy.
So, if it is insured, there is often nothing to deduct when the asset is lost or destroyed.
As you have probably gathered by now, claiming the residual value on depreciating assets and capital works deductions “is complicated”.
I would recommend speaking with your accountant or financial advisor prior to engaging a Quantity Surveyor to carry out a scrapping schedule. If you are going to proceed with this type of report, it is advantageous to have the quantity surveyor visit the property prior to you starting renovations.
Every investor – whether expert or amateur – should be looking for the same things in a property investment to ensure its success.
While there is no exact formula for buying a successful investment, it’s handy to have a checklist to consult to make sure you’re on the right track.
Below are some of the fundamentals you should be looking for when buying. Be aware that this isn’t an exhaustive checklist. However, it can serve as property investment tips that will help guide your decisions.
Property must haves:
Good location – The old adage still rings true; it’s all about location, location, location. Well, maybe it’s not all about location, but the fact is you can change a property, but you can’t change a location. Being close to amenities such as shops, schools, public transport and even major transport routes is key when it comes to selecting a good investment property.
Growth drivers – Are there any major projects taking place in close proximity to drive up the value of the property? This might be in the form of new or planned infrastructure or commercial developments that will improve amenity or access to the area. This is likely to draw more people to the area, pushing up demand for homes.
Population growth – Are people moving to the area? Look at population growth figures in the area you’re buying in. Then determine whether there are factors drawing people in, such as employment nearby and improved amenity.
Tenant appeal – Is there demand from renters in the area and for the type of property you’re purchasing? Does your property have the features tenants want? What are the vacancy rates? Demand from your target demographic is the key to securing a strong return.
Build quality – While location is key, the property you buy is important too. This is especially true if you want to attract quality tenants. Do your due diligence, which includes getting a building and pest inspection, to ensure the home you’re buying is of a good quality.
Value-adding potential – A well-selected property should see capital growth. However, it’s always a good idea to have the ability to add value through a renovation or by adding a room or a car park, for example. Value-adding potential also comes in the form of a change in zoning that will allow for development. If the market slows you may need to manufacture growth to increase your equity.
Liveability – Does the property have a good layout? Does it have the features people want, such as extra bathrooms, car spaces, security, and a nice outdoor area, whether it be a roomy balcony or a good deck and backyard? All of these things will make it more sought after. Liveability also goes for the suburb. Ensure you buy in an area with a good community due to plenty of amenity and nice aesthetics.
Individuality – A property that is unique is some way – or that stands out from the crowd – can experience strong growth as it will be in high demand amongst buyers. This is especially the case when it comes to units, particularly in areas with a lot of supply.
Scarcity – Does demand outweigh supply in the area in which you’re buying? This applies to the area in general as well as the property type. If there is greater demand than supply in terms of both buyers and renters, the property value and rental rate will be pushed up.
Low maintenance – Select a property that won’t require a great deal of maintenance. This will save you money and keep your tenants happy.
Proximity to employment – People like to live in close proximity to work, so make sure there are employment options nearby. If you’re buying in a regional area make sure there’s more than one industry in the town.
Stability – Have property prices been stable in the area in which you’re buying? Ideally you want a history of consistent growth, avoiding areas that have experienced big price falls.
A solid history – Do your research and make sure the property hasn’t been sitting on the market for a long time, and if it has, determine why. Make sure it’s not due to an inherent problem with the property. Finding out why the sellers are moving on is also important. The last thing you want is a property that isn’t selling for a good reason.
The right numbers – You want the property to stack up from an investment perspective, with good potential for capital growth and decent rental yields. Make sure the numbers add up! What is the rental yield, what are the total costs, how much will you be out of pocket for?
While a property investor’s major goal is likely to be capital growth, they’ll also be looking for solid rental yields to help them hold onto their asset.
To achieve the best possible rental return, you’ll need to maximise the appeal of your property to potential tenants. But what do tenants want? Generally they’ll want a home in a good location, close to employment, amenity and public transport. These are all things you should consider when you’re buying.
But you should also drill down to who the tenants in the particular area are, and what they desire from the property itself. How many bedrooms and bathrooms do they want? Would they like an outdoor area? Will they value nice window coverings?
If you already own a property there are several things you can do to increase the weekly rent and maximise your rental yield. Many of these are simple enhancements that won’t require a huge outlay of funds.
It’s often better to focus on increasing your income rather than cutting back on expenses by, for example, being lax in your maintenance of the property. Keeping your tenants happy will pay off in the long run, as you’ll likely have fewer vacancies and your tenants will be more willing to pay a higher rent.
While you can also consider self-managing to cut back on costs, this can backfire if it’s not done properly, costing you even more out of your own pocket.
So what can you do to increase your income? We’ve put together the below list to give you some rental yield tips. Just remember, whatever you do will depend upon what your tenants want – and are willing to pay more for.
And don’t forget to maximise your deductions for depreciation, which can further boost your rental yield.
Make your rental property pet-friendly
Australia has one of the highest pet ownership rates in the world. More than half the Australian population own an animal.
The reality is, however, that it can be difficult for tenants to find properties that a) allow pets and b) are suitable for pets. So it makes sense that if you allow pets in your property you’ll not only widen the potential rental pool, but you’ll also be able to command a higher rental rate. Some property managers estimate you could charge an extra $20 or $30 a week if you allow pets.
While pets can cause damage there are ways you can mitigate any potential problems. Such as having a relevant clause in the rental contract, having a vigilant property manager to regularly inspect the property, and covering yourself with appropriate insurance.
Provide modern technology
Ensure your property is well and truly in the 21st century by providing up-to date technology that every tenant expects – and demands – in a home now.
This includes having a strong internet connection, a strong mobile phone signal, adequate power points and even the ability to install pay TV.
Ceiling fans may be adequate in some circumstances, but most tenants dealing with an Australian summer will want air conditioning. Nowadays, most will be willing to pay a premium for it.
Heating can be just as important as cooling. Make sure you get a reverse-cycle air conditioner if you’re installing one and put it in the areas where it will have the greatest impact.
Offer added extras
Providing your tenants with added extras that make your property more comfortable to live in, such as a dishwasher, washing machine, dryer, clothesline or even flyscreens, can lead to an increase in rent.
Remember you’ll be responsible for maintaining and repairing any appliances, so only install something that you’re sure will be beneficial.
Furnish your property
While this will require an outlay of funds at the beginning, it could pay off in the end with a boost in your rental income and yield.
Whether or not this works, however, will depend on the market in which you’re renting your property. It’s usually best suited to inner-city areas. So, while it won’t be for everyone, it can work very well for short-term renters, such as executive rentals or student accommodation.
If you furnish your property well, with modern furniture, it can add hundreds of dollars per week to the rent.
Make it safe and secure
You don’t need to go overboard with high-tech alarms or CCTV, but make sure your property is safe and secure, with doors and windows that lock properly.
Consider adding security screens, or if you want to go a step further you could invest in swipe card security measures. Privacy is also key.
Add some off-street parking
Public transport infrastructure is improving in many places, but people still like to drive their cars.
Your property should have at least one parking space, and if you have a second – even in the form of a shade-sail carport – it will be more in demand.
Having off-street parking in inner city areas will command the greatest premium, as this is where it’s most limited.
Create more storage
Creating an extra storage space can lead to higher demand for your property and higher rents.
Built-in wardrobes are very important, but renters may also like an outdoor shed or a cupboard under the stairs. Creating storage is fairly easy to do and will likely require only a small outlay of capital.
Presentation is important, so undertaking renovations can be a great way to improve your yield.
If your budget is small you can just do some minor cosmetic work such as painting or changing floor coverings, or even fixtures and fittings in the bathroom and kitchen.
You can, of course, also do more major renovations. Such as a complete overhaul of rooms, or even adding a bathroom, bedroom or an internal laundry.
Many tenants will also pay more for an outdoor space where they can entertain. You could also consider adding a veranda or deck, but this will come at a hefty cost.
Just make sure you’ve done the calculations and you know you’ll be getting your money’s worth by not only attracting more tenants, but by adequately increasing the rent.
Charge market rent
Perhaps surprisingly, there are plenty of landlords renting their properties below market. If you’re not charging market rent, raise it, and review it regularly. A good property manager can help with this.
Add another dwelling
Adding a second dwelling, such as a granny flat, that can be rented separately can increase your rental income.
This will only suitable in areas that allow it of course and it can come with its own complications, as it may be harder to find tenants, and rent on the main house can also decrease.
Install solar panels
This can lead to a decrease in a tenant’s electricity bills, and consequently they might be willing to pay more rent. The installation costs are significant, however, adding up to $3000 or $4000, so you’ll need to ensure you can recoup this – and more – in increased rent.
Consider arrangements outside of a long-term lease
Renting the property by the room can maximise your rental return, as can holiday letting or doing short-term leases.
Beware of the possible drawbacks though, as there can be higher vacancies and more wear and tear; any rental increase will need to make up for this.
Don’t Forget Depreciation on Your Spring Renovation
I don’t know about you, but every time I see that sun coming towards spring– I start thinking “What can I fix up around the house… or who can I get to do it!”
But before your excitement gets you too caught up in painting your cupboard a crisp lime green, or thinking whether your wallpaper should have a touch of yellow or orange, it is helpful to remember the exciting benefits you may get with depreciation. After all, wouldn’t renovating be more rewarding if you knew that part of your expenses would come back to you through tax deductions?
How does it work?
When you renovate an investment property, you can actually claim particular expenses that you incurred as part of your renovation work. This includes the cost of that tile work you just did for your bedroom, or maybe that new edgy and urban kitchen sink. These things can actually get you a depreciation claim of 2.5% annum over a 40-year period. Even upgrading your plant and equipment items such as appliances and furniture also qualify for depreciation. Talk about claiming a reward for rewarding yourself! Where else can you get that?
2 Tips to get you excited this Summer
Property Tip 1
Scrapping reports – If you buy a property and are going to renovate the property, it’s worth getting a Quantity Surveyor out like Washington Brown, who will attribute values to those items that are about to be removed. This can add up to a substantial amount, especially if the property was built after September 1987. In order to do this, the property has to be income producing prior to the commencement of the renovation.
Property Tip 2
Depreciation Schedule – Once you’ve got your hands dirty and completed that renovation – get a depreciation schedule prepared on the new work that has just been completed. The depreciation process starts all over again!
Now, off you go with a spring in your step , knowing that your renovation work didn’t cost all that much since you have tax deductions to expect by the end of the year.
Learn how to stay under the ATO’s radar by watching this video
A depreciation schedule on your investment property can generate significant tax savings – as long as it has been complied correctly.
In my experience there are three areas the ATO tends to target come tax time.
One of them is whether you’ve claimed repairs and maintenance correctly. This can be tricky.
Your property must also be income producing in order to claim depreciation.
For instance, if you make a repair while living in the property, then move out 2 months later, you can’t claim it.
The third area of concern is in relation to the building allowance.
The building allowance refers to the wear and tear on the actual building – things like bricks and concrete. You have to make sure they’re being claimed in the right category and not alongside items like carpets and blinds, which are considered plant and equipment.
The building depreciation allowance must also be claimed on construction costs – NOT the purchase price of your property. A mistake I see time and time again.
And that’s where we can help. Quantity Surveyors are recognised by the Australian Tax Office as the right people to estimate these costs. NOT valuers nor real estate agents.
So there you have it. To stay under the ATO’s radar, make sure:
Your repairs are being claimed correctly
The property is an income producing asset
The building allowance is based on the construction cost.
And most importantly, use a qualified quantity surveyor.
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
How to save THOUSANDS OF DOLLARS a year on your investment property taxes with these 7 Property Depreciation Tips!
Depreciation can still be a bit of a mystery to even the most experienced of property investors. To novice property investors it most certainly always is.
To simplify depreciation, basically, it allows you to claim the wear and tear of an investment property as a tax deduction against your income.
There are two components to this claim; Building Allowance (bricks, concrete, etc.) and Plant & Equipment (carpets, ovens, etc.).
(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).
As Quantity Surveyors, we categorise elements of the building into a “Depreciation Schedule” which allows you to legally claim the right deductions come tax time.
Well here are seven tips you may want to consider this tax year to increase the yield on your investment property:
Small Items and Low-Value Pooling – A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible.Individual items under $300 can be written-off immediately.So if you are buying a microwave for your property – pay $290 instead of $310 and get the full amount written off!You can also try to buy items that depreciate faster. Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate.So for instance, a $1200 oven attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.
Depreciation reports are tax deductible – Book and pay for a depreciation report before the 30th of June, and you can claim the cost of the report as an outright deduction.On average, property investors can claim between $4,000 to $15,000 in depreciation in the first year alone. The age of the property has a lot to do with why that range is so great. The newer the property, generally, the more depreciation you get.
Renovated properties – You can buy a property that might be over 100 years old…and provided it’s been renovated after 1987 you can claim the costs of those renovations. So even if you didn’t do the renovation, the deductions are there for the taking!
Older properties – It’s true that new properties get the maximum depreciation allowance available to property investors, but don’t discount old properties. The minimum depreciation allowance on any property starts at around $2,000 in the first year alone.
Scrapping reports – If you buy a property and are going to renovate the property, it’s worth getting a Quantity Surveyor like Washington Brown to inspect the property BEFOREHAND. We will attribute values to those items that are about to be removed. This can add up to a substantial amount, especially if the property was built after September 1987. In order to do this, the property has to be income-producing prior to the commencement of the renovation.
Old properties depreciate too – In order to claim the Building Allowance the property needs to be built after September 1987. But, you could still claim depreciation on things likes carpets, ovens and blinds – regardless of the age (if unaffected by the 2017 Budget). Most Quantity Surveying firms guarantee to get you at least twice their fee as a tax deduction in the first year or give you the report for free.
Backdating reports – If you haven’t claimed depreciation because you didn’t know about it – there is good news. You can go back and amend your previous two tax returns and get the missing deductions backdated. It will cost you in accounting fees, but could well be worth it.
If you are a property investor and don’t have a depreciation schedule – get a free quote here.
Or use our free calculator to work out for yourself how much you could be saving!
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Dealing with Washington Brown has been a breeze. I'd originally inquired if there were depreciation benefits for a property and after providing some additional feedback, I got a positive response...read moreDealing with Washington Brown has been a breeze. I'd originally inquired if there were depreciation benefits for a property and after providing some additional feedback, I got a positive response that there were benefits available to be claimed and so I engaged them to produce a depreciation report.
Handled completely online, I was presented with a very simple process and the tracker allows one to know where things have progressed through each of the stages. They were able to engage with my property manager and have the inspection scheduled and the report completed, before being emailed to me. A professional and easy to use detailed report, Washington Brown have done an excellent job and were a pleasure to deal with.read less
We have been with Washington Brown for many Years..
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spec. the first years it is hard to pay for...read moreWe have been with Washington Brown for many Years..
We have div, properties ..
It helps us a lot with the Tax reduction..
spec. the first years it is hard to pay for everything..
We always come back..
Staff is very helpful and explain the situation and what you can and cant do..
Very import-end to understanding the Tax rules.
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We found Washington Brown very easy to deal with. Their website was clear and simple to use and they provided us prompt service at a good price. I would gladly...read moreWe found Washington Brown very easy to deal with. Their website was clear and simple to use and they provided us prompt service at a good price. I would gladly recommend Washington Brown to others.read less
Detailed depreciation report which maximises our tax offsets. It is definitely a must to have Washington Brown do a depreciation report for all your investment properties. You never know how...read moreDetailed depreciation report which maximises our tax offsets. It is definitely a must to have Washington Brown do a depreciation report for all your investment properties. You never know how much money you can recoup from depreciation until you’ve got a Washington Brown depreciation schedule. It is an absolutely amazing wealth creation strategy.read less