One of the major factors about buying a new completed property or off the plan property is the huge claims that you can make in depreciation. There are also benefits for those looking to do a spot of renovating on an established home, where even the smallest of changes can have a big impact on the end price when selling this property.
Depreciation on a new building can actually add up to thousands of dollars a year, so it’s worth knowing exactly what you can claim. It is also a ‘non-cash’ deduction, meaning you don’t have to fork out any money each year to claim the loss.
So what exactly is depreciation? Put simply, depreciation is the loss in value of an item such as a building over a period of time. For investment properties you can claim against the depreciation of your property as well as certain internal fittings and fixtures.
Internal fittings and fixtures include carpets, air-conditioning systems, blinds, microwaves etc and can depreciate from anywhere between 10% to almost 40% per annum for the first five years depending on the initial cost.
Here are 5 factors to keep in mind when it comes to depreciation.
1) Claims for depreciation apply to residential buildings built AFTER 17 July 1985.
- They must be owned by an investor for rental purposes.
- You can claim a building depreciation allowance of 2.5 per cent per annum of the original construction cost.
- This can be claimed for a total of 40 years with the highest claims in year one.
- This can be offset against other income on your tax return.
2) Some items can be depreciated for the full amount in the first year.
- Individual items less than $300 can be claimed straight away.
- Note - It’s better to buy an item at $299 than at $330 as you can write this cost off immediately, rather than depreciate it at 10% per annum for five years.
3) Items valued between $300 and $1,000 can be depreciated at a higher rate.
- Some assets can be assigned to a low-value pool meaning these can be claimed at a rate of 37.5%.
- For example, a dishwasher might cost $975, meaning you can claim $366.
4) High cost items can also be claimed.
- These can include shared communal items such as a gym, security entrance etc.
- For example: if a gym cost $6,000 in a building of 25 units, this costs you $240 which can be depreciated at once.
5) Ensure that a Depreciation Schedule is drawn up.
- This can be prepared by a specialist Quantity Surveyor.
- You know exactly what you can and cannot claim.
- Maximises your cash return.
Remember that depreciation is basically claiming on items that wear out over time through use and is a completely legitimate way to reduce your taxable income. Newer properties also have a higher rate of depreciation compared to a property that is 25 years old with only 15 years of depreciation left, so all investors should be taking advantage of this.
Published on 5th of November 2014 by Marty Stanowich