As property investors, we all want to maximise our tax return refund on our investment properties.
Most of you may already be claiming depreciation but what you might not know is that there are some simple strategies you can use to supercharge your depreciation deductions. Our mortgage clients have used depreciation deductions to boost their rental deductions – some up to the tune of $10-20k per year.
What is depreciation?
Depreciation is the ‘wear and tear’ on buildings, and fixtures and fittings over time. Property investors are able to claim a tax deduction for this wear and tear over the ‘effective life’ of the asset. For buildings (capital works), this is generally over 40 years; for other items, the Australian Taxation Office (ATO) publishes on their website a list of effective lives of things that you can depreciate every year.
What can you claim?
Some examples of items you can claim depreciation on:
Unit owners can also depreciate a percentage of the common area in the apartment block. This includes items such as:
The amount of depreciation you can claim is usually worked out by a quantity surveyor in what’s called a capital allowances or tax depreciation schedule.
How depreciation helps improve cash flow
Let’s use an example to illustrate how depreciation helps improve cash flow. In this example, Peter Smith buys a brand new one-bedroom apartment for $400,000 on 1 July. He rented out the property immediately and got a quantity surveyor to prepare a depreciation report for $750.
Based on the depreciation report, Peter can claim a deduction of:
That’s a deduction of $8,000 per year to boost his tax refund without needing to pay any additional cash. Plus Peter can claim the $750 he paid the quantity surveyor as a tax deduction.
5 effective strategies for maximising depreciation
Whilst these strategies have worked for some of our clients, we would always recommend you to seek a qualified accountant to ensure you’re using the right strategy for your personal circumstances.