Claiming Property Depreciation On Existing Property
Tax deductions can be claimed even on existing property bought from another owner. But what is property depreciation and why is it worthwhile to include when filing for annual taxes?
What is Property Depreciation?
Property depreciation is a kind of tax break that enables investors to offset the decline in value of their investment from their taxable income. It helps investors pay less tax and maximize their investment.
According to Australian Law, tax deductions can be claimed on the building structure and items considered to be a permanent part of the asset. But not all buildings can qualify for property depreciation because some of them might be too old to satisfy the age limit requirement declared by the ATO.
Oftentimes, properties and constructions made before specific dates can only claim for Plant and Equipment. According to Australian Law, Building Allowance can only be claimed for properties constructed after the following dates:
- Traveller accommodation – 21August 1979
- Non-residential – 20 July 1982
- Residential – 18 July 1985
- Manufacturing – 20 July 1982
You can see that cut-off dates for tax claims are different for commercial and industrial properties. For instance, residential properties built after July 1985 can claim Building Allowance and Plant and Equipment deductions. However, constructions on the property made prior to this date can only claim for Plant and Equipment deductions.
Properties qualified for depreciation can claim the 2.5% deduction on the asset for the next 40 years. For example, if the property costs $100,000 to build in 1990, you can claim up to $2,500 as depreciation annually until 2030.
It’s possible to claim deductions on renovated properties. Even if the previous owner of the property is the one that did the renovations, you can still claim for depreciation.
Property Assessment and Claiming Deductions
Accountants and real estate agents are not allowed to estimate the value of the construction costs. The ATO’s Tax Ruling 97/25 says that only qualified quantity surveyors can estimate the construction value when the costs are unknown. Accountants can only offer advice on how to file tax depreciation, but the assessment of the actual value of the property must be handled by specialists like quantity surveyors.
When hiring a quantity surveyor, make sure they’re a member of the AIQS. Otherwise, don’t hire them because they haven’t completed the accreditation requirement.
Site inspections are required by the ATO. A qualified quantity surveyor will document their findings to be used as evidence in case an audit is required related to the filing of taxes. It will take around 2-3 weeks to complete the whole assessment process.
There’s a cost associated with preparing the tax depreciation schedule. It depends on the type, size, and location of the property on focus.
But this shouldn’t deter you from claiming tax depreciation because surveyors often offer a money-back guarantee. Some even give the report for free. Additionally, their fees are completely tax-deductible.
If you’re wondering whether it’s worth applying for property depreciation, you can use online calculators that will give you an estimate of how much you’ll save. Most of these calculators are free to use for convenience.