INTRODUCTION TO INVESTMENT PROPERTY TAX DEPRECIATION
Many property investors I meet say to me, “My accountant never mentioned Tax Depreciation Schedules to me when I purchased my rental property”, and then ask, “What is a Tax Depreciation Schedule?”
To put it simply, it is an assessment of the decline in value of every component in your rental property. This annualised decline in value can be used to offset you taxable income as if it were a cost against your property. In fact it recognises that all parts of your property deteriorates and requires replacement over time.
The Depreciation Schedule is prepared by a suitably qualified Quantity Surveyor i.e. one that is registered with the Tax Practitioners Board, and is sometimes referred to by accountants as a “Quantity Surveyor Report” when advising their client property investors to obtain a Depreciation Schedule in respect of their rental property.
The first part of the process of obtaining a Depreciation Schedule involves the quantity surveyor visiting your investment property and undertaking a detailed survey accompanied by measurements and photographs, in order to establish the construction cost of the building, as well as placing a value on all the depreciable components from floor coverings, through to appliances, heating, cooling light fittings, window coverings and many other items.
The Tax Depreciation Schedule itself is a structured document that essentially has two aspects relating to your Investment property’s allowable tax deductions.
The first aspect ‘Building write-off allowance’ which essentially is the “Shell”, fabric or structure of the building and includes property surrounds such as hard pavements, fencing, services and the like, and known as “Division 43” capital allowances. These costs are claimable as a straight line deduction of 2.5% over 40 years and commence from the date of completion of the works.
The second aspect is loosely named “plant and equipment” and is defined in “Division 40” of the Tax Rules, and details numerous items including appliances, hot water systems etc. These are depreciated at varying percentages based on their deemed effective life which generally varies in the range of 5 to 20 years.
All of this is calculated by the quantity surveyor, and all items are described in a report that covers all items and summarised to show the total deduction available each year for your investment rental property. These deduction amounts are then included by your accountant as a deduction against your taxable income each year.
The end result is a significant reduction in your taxable income and can fall in the range of $8,000 to $22,000 per year dependant on the property.