In the world of investment novices, ""Depreciation"" is a dirty word right there in the trenches with other delinquents like ""arbitrage"" and ""derivatives."" However, to the adept at property investment, depreciation can be a means to an end – a way to salvage one's bottom line when the tax collectors come knocking. ""How does that work?"" the novice might wonder. It's pretty simple: in the same way one can claim the deterioration of a vehicle bought for revenue-generating functions, one can decide to project the depreciation of an asset to reflect overall taxable income.
This is something that experienced investors do a lot, often going as far as to factor in depreciation even before buying subsequent properties. People who buy properties have the prerogative to depreciate said property and its assets against their taxable income if they decide to.
This separates people who are experienced in property investment from those who are not. And the people who are not experienced inadvertently contribute to the considerable amount of dollars that go into tax coffers unclaimed every year. To ensure this does not happen, it is a simple matter of hiring a professional quality surveyor to audit the property and prep documentation with their accountants. This helps to salvage some money every tax period.
Many people do not know about this, and that's why it becomes imperative to learn. Think of this article as an essential guide filled with fundamentals to help you save substantial amounts of money.
What does property depreciation mean?
In layman's terms, this is a sort of tax break that permits property owners to counterbalance their asset value dip against their taxable income. It is legal, a prerogative permitted by the Australian law, which allows property investors to petition for reductions from their taxable income based on the drop in value of their properties, the structures fixed to the properties, and the appliances found within the properties (these include things like washing machines, ovens, blinds, etc.).
Apart from the fact that this salvages income through tax deductions, it also takes the form of a ""non-cash"" deduction, implying that it does not have to be paid for regularly, like most tax forms. Instead, the reductions are incorporated into the property's value (the price at which it is bought or sold).
Are there properties that eventually become too old to make depreciation claims?
There are no properties too old for depreciation claims. For instance, if the property in question was built following July 1985, you as the owner would be allowed to inquire about deduction on Building Allowance (the structure itself) and Plant and Equipment. If the house were built before July 1985, you would only be allowed to make claims on Plant and Equipment; not as good as being able to make claims in both, but it is something. Of course, corporate and industry structures are liable to different cessation periods.
Am I allowed to have accountant prepare my documentation?
This depends on the period during which the structure was constructed. If it was built before July 1985, you are allowed to have accountants prep reports for you. If the property was brought up during subsequent years, however, accounts are barred from helping to estimate the price of construction.
The Australian taxation office has mandated through Tax Ruling 97/25 that, when construction prices are unknown, quantity surveyors are suitable for hire for estimation. To paraphrase the CEO of the Australian Institute of Quantity Surveyors (AIQS), Terry Aulich, accounting professionals are allowed to give counsel on different facets of depreciation and decline in value with respect to tax. They, however, do not have the jurisdiction or knowledge or savvy to deal with construction prices and real estate depreciation.
He says that the appropriate people to deal with fair estimates of construction costs are quantity surveyors. This is due to their experience and educational background in giving and forming the baseline of what would be appropriate for a property tax depreciation routine. He also asserts that with the considerable technical assistance available, it becomes brash to depend on estimated conjectures when dealing with the Australian Tax Office.
Aulich also agrees with the necessity of clients being thorough when hiring quantity surveyors. He talks about how clients should always check the credentials of potential hires. Questions to ask include the status of the surveyor as a part of the Australian Institute of Quantity Surveyors. All members are required to have a certification that indicates competence, so proof of membership essentially validates professional savvy.
Does the property need to be inspected?
Yes. This ensures that all stipulations and requirements laid down by the Australian Tax Office are met. The AIQS mandates that inspections are imperative.
Professional quantity surveyors take records of equipment that is liable to be depreciated. This ensures that all possible tax deductions are taken advantage of without fail and provides valid documentation in case of investigation.
Most quantity surveyors interact with clients directly. This fosters transparency between them and either the property managers or tenants. Some periods hold optimal value when picking quantity surveyors—for instance, hiring one after settlement and before the tenant has moved in.
Can I make claims on a property that was bought three years ago?
Of course. Accountants are needed for this; they can help you redraft tax returns made two years past. Some properties of this sort are not allowed to validate claims, so it would be better to research through the Australian Tax Office to check your eligibility.
Can I still claim depreciation after my property has been renovated?
Most of the time, renovation is fine with selling a property at an increased price. However, one can still claim depreciation despite this, and it does not matter whether it was you or previous owners that made these renovations. All one has to do is record how much was spent on the renovation and give this information to the Australian Tax Office.
Should information about the amount spent on renovation be irretrievable, the Australian Tax Office has recommended that a quantity surveyor be qualified to provide estimates.
Does the depreciation schedule cost much?
It depends. Various factors would contribute to how much one spends on making depreciation claims. Some of these factors include structure location, structure size, accessories attached to it, the type of structure purchased, etc. Quantity surveyors often do reports free of charge or offer packages that are easy on the pockets. They are also entirely tax-deductible.
Is there an estimate of how much I would save?
Again, this depends on various factors. Depreciation calculators can be found through internet searches to help you with estimates. Also, here's a little bit of advice: try not to pay for these estimates. It is a well-known fact that the best estimates are free.
How long would it take?
Usually, the whole process takes around 2-3 weeks, depending on when the surveyor is ready to inspect the property.