Every sensible property investor aims to maximise return on investment. While many focus keenly on rental yields and property values, they often overlook a significant wealth-building avenue: property depreciation.
This comprehensive guide demystifies property depreciation, explaining what it is, its implications, and how investors can utilise it effectively within their investment strategy.
Research shows that up to 80% of investors don’t claim depreciation and miss out on significant tax benefits simply due to confusion or misconceptions surrounding rental property depreciation rates – especially regarding older properties.
An investment property depreciation schedule is among the most beneficial but underused tools available for property investors to maximise their tax returns.
Understanding Depreciation
Depreciation refers to the gradual wear and tear of an asset over time. In property investment, it can apply to both the building structure and any fixtures or fittings.
Types of Property Depreciation
The two main types of property depreciation are:
- Building Depreciation: Also known as “capital works deductions,” it covers wear and tear on the building structure – broadly, anything that is permanently attached to the property. This may include walls, roofs, doors, and windows. The capital works deduction is calculated at 2.5 per cent of the total construction costs per year over 40 years.
- Fixtures and Fittings Depreciation: Often referred to as “plant and equipment,” these cover items within the property that are easily removable – think ovens, curtains, carpets, and air conditioners.
The Significance of Depreciation for Property Investors
Depreciation can prove a significant windfall for investors. Essentially, it acts as a form of non-cash deduction that investors can claim against their taxable income – reducing their tax bill and enhancing their cash flow.
Typically, you could expect to pay between $385 – $770 for a depreciation schedule. Your fee will vary based on the property type, location and complexity.
Depreciation Schedules and Their Role
A depreciation schedule is a comprehensive report that outlines all your claimable items and their associated depreciation over time. Prepared by a qualified quantity surveyor this schedule outlines every depreciation deduction available throughout the lifetime of the property.
Implication of Property Depreciation on Tax Implications
Depreciation can elicit beneficial tax implications. By decreasing your taxable income, it reduces the amount of tax you need to pay – giving you more money to reinvest or pay off loans.
Maximizing the Benefits of Depreciation
To make the most of depreciation:
- Ensure all depreciative items are included in your depreciation schedule.
- Claim everything you’re entitled to.
- Keep abreast of any legislative changes that might affect depreciation claims.
Depreciation in Practice
Consider an investor who owns a property worth $500,000 with a yearly rental income of $25,000. After accounting for all costs, their taxable income from the property is $15,000. If their depreciation claim for the year is $5,000, it will reduce their taxable income to $10,000, lowering their tax payable.
While depreciation might seem a daunting concept, taking the time to understand and implement it into your investment strategy can be beneficial. It can save you vast amounts of money in tax, padding your bottom line and leading you closer to financial freedom.
Remember, though, every property is unique. The specifics of depreciation claims will inevitably differ from one investment to the next. For personalized advice catered to your specific situation, don’t hesitate to reach out directly at leonie@wealthology.com.au. Act today and unlock the potential boost that property depreciation can bring to your investment strategy.
