We’re all used to values of properties going up over time. Unlike a car, which loses value the second you start the engine, a property can build equity immediately… especially if you negotiate the purchase for less than market value.
However, a property is like a car in that it does suffer wear and tear and, if you have purchased it for income generating purposes, you can claim the depreciation of the property against your taxable income.
The tax office refers to property depreciation as a ‘non-cash deduction’, which means you don’t have to pay cash first, in order to claim a deduction. Rather, you are compensated because the building itself, as well as what’s inside it and the materials holding it together, will become worn out over time.
It doesn’t matter if any of this was initially paid for by a developer or previous owner, you can continue to claim deductions as the property and its sundries lose value.
There are two types of depreciation you can claim: Plant and Equipment – which means items like appliances, carpets and blinds; and also Building Allowance, which means construction costs like concrete and brickwork.
If your residential property was built after July 1985, you can claim both types of allowance, but if it’s older you can only claim on Plant and Equipment.
If your property was constructed after 1985, only a qualified quantity surveyor can provide an estimate of unknown construction costs by law. So don’t listen to real estate agents, valuers, accountants or property managers if they claim they can do this.
When sourcing a quantity surveyor, ask if they are a member of the Australian Institute of Quantity Surveyors (AIQS).
When you find one, they will conduct a site inspection, noting down and photographing all depreciable items. The documentation will come in handy if you are later audited.
You can also claim depreciation on renovations, even if they were carried out by the previous owner. Renovation costs can be estimated by the quantity surveyor if unknown.
The cost of having a depreciation schedule prepared can vary, but most providers claim they will save you more money than the cost of the fee. The fee is also completely tax deductible.
Depreciation schedules will usually take two to three weeks to complete and can also take into account tax returns from up to two years ago.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au.
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.