Many property investors are unaware there is a legal and efficient way to increase their tax return each year. It’s done so via an investment property ‘depreciation schedule’ or ‘depreciation report’.
A tax depreciation schedule is a document that highlights items within your investment property that may be depreciated. This means that the cost of these items, can be depreciated each year when submitting your tax return to highlight the amount by which they have ‘lost value’ in that given year.
A depreciation will offset any earnings you make via the investment property, helping you pay less tax or overall reduce your taxable income.
Items that can be depreciated include the item itself, the delivery costs of said item, the installations costs and any other costs required to enable that item to be utilised by your tenant.
For example, if you needed to install a new oven:
- You can claim the cost of the oven itself.
- You can claim the installation and delivery of the oven.
The depreciation report will create a ‘schedule of depreciation’ whereby a fraction of the costs above are depreciated each year that the property is run as an investment, up to a certain amount.
What are some common items that are covered in a depreciation schedule / report?
- Electrical appliances and white goods (ovens, microwaves, fridges, washing machines and dryers that are owned by the property owner)
- Carpet, and floor covering made of vinyl
- Blinds, curtains and other window coverings
- The hot water unit (gas or electrical) that heats the homes water
Can you depreciate items you didn’t personally buy and install?
Yes, items that came with your house (such as the oven) can still be depreciated in the report. While you may not have physically been the one to purchase the item, you did technically ‘purchase it’ when you bought the house (as it was included in the sale).
Is my investment property eligible for a property depreciation schedule / report?
Recent changes in the federal budget have tightened the eligibility of using depreciation schedules. However, these changes are only relevant to people who purchased properties after 9th May 2017.
- If you purchased your investment property prior to 9th May 2017; you can still get a full depreciation schedule with no complex changes to worry about.
- If you purchased your property after the 9th May 2017; the changes will apply to you and you will need to discus this with your accountant to understand what can and cannot be depreciated.
Is the investment property depreciation schedule tax-deductible?
Yes, you can claim the costs you incurred to have the reported created. This means the fees charged by a specialist company who provide tax depreciation reports can be offset against your earnings with your next tax return.
Are improvements to investment property able to be depreciated?
No, improvements are not able to be depreciated. You can only depreciate ‘repairs’ by which the type of repair is classified as necessary to get your investment asset (the home) up to scratch in order to generate income.
You can claim the cost of improvements however, as a ‘capital allowance deduction’ – this is normally at a rate of 2.5% per year over 40 years (but the rules often change). So speak to your accountant when it comes to claiming improvements.
How much does a depreciation schedule cost?
A company such as Corpred, who specialise in producing depreciation schedules charge in two ways:
- Without inspection: $299
- With an inspection: $529
If you go without an inspection, there is a high chance you won’t capture all of the legally allowed deductions you can make, as it’s based off what you tell them the house has.
If you get an inspection, a professional will inspect all facets of your house and records all available items that can be depreciated.
Both options will give you an official report, in an ATO recognised format, to use with your accountant come June 30th.
This article was produced by Savings Guide with the help of Scott Kay at Integrity Plus Accounting.
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Scott Kay is an Accountpreneur (Chartered Accountant and Entrepreneur) who loves people and bridging the gaps between:
- Knowledge and action
- Tax/money and the more important things in life!
Scott featured on A Current Affair in 2010 with his blog for teaching young people about money. In the years since, he has grown in many ways including his passion to help individuals succeed financially particularly with property and business via clever thinking and technology.