How to depreciate and save
Article Category: Demographics
By Jenny Dillon, 22 May 2008
MORE than half of small property investors are losing out on potentially thousands of dollars each year because they are failing to accurately claim depreciation on their assets.
"Many investors either don't have an accurate depreciation schedule or have a schedule that's out of date,'' said Raine and Horne CEO, Angus Raine, whose company's valuation department came up with the 50 per cent figure. "It's quite a complex area of tax,'' he said."
A lot of accountants don't encourage their clients to get a schedule. But, depending on how much they have spent in the past year, depreciation can have a significant and positive effect on your annual yield.''
A depreciation schedule itemises depreciable assets such as carpets, blinds, curtains, air-conditioning, ventilation systems, fire alarm systems, light fitting and hot water units, among other things.
The schedule shows the year each asset was bought, the costs, and the percentage by which the asset is depreciated. Landlords can claim up to 12 per cent on depreciable assets.
Depreciation can also be claimed on the cost of improvements made after February 26, 1992, on older properties. As well as claiming depreciation of assets of between $1000 and $3000 a year, the cost of a depreciation schedule -- between $650 and $700 -- is also tax deductible.
"The ATO publishes tables of what they consider the effective life of depreciable items,'' said HLB Mann Judd tax accountant Peter Bembrick.
He said that while a cooktop, stove and dishwasher are depreciable, kitchen cupboards and sinks were not.
He explained that if it's fixed to the building, then it's not depreciable. But the investor can claim the 2.5 per cent building allowance over 40 years of its life, Mr Bembrick said.
"If you buy an investment flat that is new, you can claim 2.5 per cent of the construction costs for the next 40 years,'' he said.
If it's not new you can still claim the 2.5 per cent of the original construction cost, if you can get this information from the previous owner, he said. The claim runs out after 40 years.
A residential building built after 1985 for $300,000 could be worth $7,500 a year in tax deductions, said Mr Raine.
Landlords also often overlook capital gains tax evaluations, Mr Bembrick said. "This is particularly applicable for owner occupiers who take the decision to rent out the family home.
Paying for an evaluation as soon as the property becomes an investment can give landlords a more accurate idea about its value. Otherwise, when the time comes to sell, it becomes a very expensive business calculating the value of the property for capital gains tax purposes.
"Where renovations or additions have occurred, a back-dated capital gains tax evaluation could cost landlords as much as $2,000.''
Property investors can also prepay up to 12 months interest on the loan for a rental property in advance and claim a tax deduction for 2007/08.
"When selling an investment property, be aware that capital gains tax is triggered on the exchange of documents, not settlement,'' he added.
"If you exchange before June 30 then the whole amount of any taxable gain is included in your 2007/08 return.''
- Depreciation can be claimed on improvements made after Feb 1992
Landlords can claim up to 12pc on depreciable assets
HOW TO GET THE BEST RETURN
* Claim all deductions and depreciation before June 30
* Obtain a depreciation schedule if you don't already have one as they are tax deductible.
* Prepay up to 12 months interest in advance on an investment property and claim a tax deduction for 2007/08.
* Time a property sale for after June 30 to avoid capital gains tax for this financial year.