How do I know if my property too old to claim depreciation?

property too old to claim depreciation

Is my property too old to claim depreciation?

The short answer is no, you can claim depreciation on all investment properties.

Depreciation is split into two categories, Building Allowance which is generally deemed to be the structure (walls, slab and roof etc), and Plant and Equipment which is generally items that are attached to the structure and easily removed (appliances, carpets, window furnishings etc.)

The Building Allowance component is only valid if the property was built after September 1987 (residential). It is calculated at 2.5% of the original construction costs over 40 years. Depreciation Quote Schedule

It doesn’t matter how old the investment property is you can still claim depreciation deductions on all the Plant and Equipment.

(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).

Plant and Equipment items are claimed at varying rates e.g. you can claim depreciation on items under $300 at 100% and items under $1000 at 37.5%. Items such as air conditioners depreciate over 10 years. You can also claim depreciation on a portion of the common area plant in strata buildings.

The important thing to remember with Pre 1987 built residential investment properties is that most of the plant and equipment will be depreciated after 5 years of ownership.

Property depreciation starts from the settlement date. So, if your investment property was owner-occupied for any time since settlement, it’s important you speak to an experienced Quantity Surveyor like Washington Brown to ensure it is worthwhile for you.

How Does Investment Property Depreciation Really Work?

how does investment property depreciation really work

What is Property Depreciation?

Ever wondered how does investment property depreciation really work?

Just like you can claim the wear and tear on your car, you can claim depreciation for your property investment. It has to be an income producing property.

Bare in mind, depreciation law varies from country to country in relation to depreciation.

We’re pretty lucky here in this country, in that we can claim depreciation on an investment property. Actually, I think we really have the most fairest depreciation laws in this  country compared to any other country because some countries base the depreciation on the actual purchase price, I think it’s kind of fair that we base our depreciation laws here Depreciation Quote Scheduleon the construction cost. And that makes sense to me.

But in summary, what you claim in terms of depreciation reduces your taxable income.

So for instance, if you earn $60,000 per annum and if you get a report from Washington Brown that says you can claim $10,000 in depreciation on that property, you should only be paying tax on $50,000 not the $60,000 that you’re earning. Pretty simple.

Now, there are only two things you need to know about depreciation. The first thing is the Division 43 deduction. That’s what is called the Capital Works Allowance and how I define it is the structure of the building, the brickwork, and the concrete.

In short, the stuff that’s going to last longer. And if you buy a residential property, in order for you to claim that, it has to be built after 1985. So if you buy a property that’s built in 1970, you cannot claim any building allowance on the structure.

If you buy property that’s built in the year 2000 when it cost a hundred thousand dollars to build the structure, you’ll get to claim 2.5% per annum over 40 years. If you bought it today and it was built in 2000, you’ll get to claim it over the next 26 years at 2.5%. That makes sense. You’ll get more.

Depreciation CalculatorThe next thing, the next common part we need to understand is what’s called the Plant and Equipment or Division 40. So that’s the stuff that wears out quicker. The ATO has defined it in two categories: stuff that wears quicker and stuff that’s going to last for a long time. So bricks, concrete, roof, and windows are going to last over 40 years. The ATO has determined a list that’s going to last for a lesser period which includes things like ovens, lifts, blinds, and carpets.

(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).

If you get more wear and tear, you actually have to replace it sooner. So the ATO says if you buy a carpet for $2,000, you can claim that over a 10-year period and you can claim it per annum. On the other hand, for bricks and concrete, which they say is going to last 40 years, you get to claim that over 40 years. Pretty simple. So the more of this stuff you have in your property, the higher the rate of depreciation.

So for instance, the high-rise apartment where you have gyms, lifts and other common property items… You get a massive depreciation.

However, you might get a massive sinking fund to pay for as well.

How to Claim a 4% Building Allowance on Your Investment Property and Get Away With It!

Building Allowance Investment Propety

Building Allowance Investment Property

4% Building Allowance Investment property

THE BUILDING ALLOWANCE (sometimes referred to as the Capital Works Deduction) is a deduction that enables property investors to offset the hard construction costs of their investment property against their assessable income. Hard construction costs may include items such as concrete, brickwork, common property items that are not plant and equipment, and even excavation. This deduction is allowed under Division 43 of the Income Tax Assessment Act (ITAA) 1997, which sets out deductions for Building Allowance.

Now, what’s so good about claiming a 4% Building Allowance? Well, obviously, the higher the deduction, the less tax you have to pay. The Building Allowance is one of those “non-cash deductions”. This means you don’t have to fork out the cash to claim it, you already did when you purchased the property.

For example – if your building was built for $250,000 and the plant and equipment was $30,000 – this leaves a Division 43 claim of $220,000. At 2.5% annually this amounts to a $5500 deduction. At the 4% rate the claim is $8800 per year.

How do you claim the 4% Building Allowance on a property?

Option 1

Purchase a manufacturing building where the core activities qualify under Section 43-150 of the ITAA 1997. Depreciation Calculator

Purchasing a building that qualifies under the industrial activities of s43-150 of the ITAA 1997 will qualify the industrial building for a 4% write off.

For instance, buildings involved in refining petroleum, milling timber, freezing primary products, printing, curing meat, canning or bottling, might qualify.

Other operations that qualify include buildings in which items are brought in or maintained in the condition in which they are sold. For instance, recently we were able to claim this allowance for a major car manufacturer on the property where its vehicles were serviced.

But not all industrial buildings qualify. More than likely, if you have purchased a single factory in a complex of 50 factory units, it’s unlikely your building will qualify.

Option 2

If you purchase several units that can be defined as “short-term traveller accommodation” you may be able to claim a 4 per cent building allowance.

ATO ID 2003/513 has provided clearer definition as to what can now be defined as short-term traveller’s accommodation. Unfortunately, it’s not good news for investors, as most serviced apartments fall back into the 2.5 per cent category. If your serviced apartment has a kitchen, you should be claiming 2.5 per cent not the 4 per cent building allowance – unless you own 10 in the same building.

Some investors expect to receive the 4 per cent building allowance because they own a holiday house and have it fully furnished. But this type of accommodation does not fit into the category.Depreciation Quote Schedule

The construction needs to have commenced after February 27, 1992 to be eligible. This type of investment generally has the highest depreciation claim as a proportion of the purchase price. This is in part to the higher building allowance but also because these types of investments have more plant and equipment in them. They generally have lifts, pools, and also are often fully furnished.

(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).

But a high depreciation schedule does not necessarily make a good investment. Many people have been burnt in the past buying these types of investments based upon the available tax deductions.

Any downside?

Surely there must be some downside in claiming the 4% Building Allowance? Well there’s no such thing as a free lunch. There is one downside – any amount claimed under Division 43 will need to be factored in when calculating your capital gains tax liability. This rule applies generally to assets acquired after July 1, 1997. But under the principal of “a dollar today is a better than a dollar tomorrow”, coupled with the CGT relief allowed, it’s still worth the exercise, especially to higher income earners.

If you need a quote for a depreciation schedule – click here – or use our free tax depreciation calculator today