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Becoming Property Tax Depreciation Wise

In terms of depreciation, what should you consider when making an investment property purchase decision?

If you are looking to purchase an investment property, it is worthwhile asking yourself a number of questions. While many investors consider location, purchase price and tenanting ability when contemplating an investment property purchase, they often overlook depreciation as an important factor. Depreciation can help unlock the cash flow potential within an investment property, often meaning the investor will have thousands of additional dollars each financial year.

There are several factors for consideration that will enable the property owner to maximise tax depreciation benefits including:

• The age of the property: Both new and older properties will attract some depreciation deductions, although a property with an age between 1-20 years will provide higher depreciation than an older property.

• The type of property: If the property is part of a strata complex or community title development, each unit is entitled to claim common property benefits in addition to the unit's depreciation benefits.

• The amount of common property: Common property items within a strata or community title complex such as lifts and swimming pools are included in the depreciation report. The more common property there is, usually results in higher depreciation claims.

• The amount of plant and equipment: Plant and equipment are items that can easily be removed from the property as opposed to items that are permanently fixed to the structure. Plant and equipment includes items such as light shades, stoves, air conditioning systems, blinds and carpet. These items can be depreciated at a higher rate and add significantly to the depreciation claim. More plant and equipment generally means higher depreciation claims.

Once you have purchased an investment property, what can you do to increase your depreciation deductions?

In order to maximise the tax benefit your investment property will attract, you will require the services of a recognised Quantity Surveyor with specific property tax depreciation skills and experience. To ensure you claim all your entitled depreciation deductions a site inspection will need to be carried out as this will accurately identify all items of plant and equipment. These specific items attract higher depreciation rates than what is applied to the building. An over-capitalised property with more expensive fittings such as ducted air conditioning and stainless steel oven, cooktop and rangehood will have a higher depreciation claim than less expensive fittings such as split system air
conditioning and an upright stove.

Example: Tiles vs. Carpet

To obtain the highest depreciation claim when removing old carpet, should it be replaced with tiles or new carpet?

Note: This does not include scrapping of the original carpet.

Replacing the old carpet with new carpet in lieu of tiles will attract a higher depreciation rate of 20% using the diminishing value method, opposed to the tiles attracting a rate of only 2.5%. In both cases you will obtain depreciation but in this case it would be beneficial to the property owner to replace the old carpet with new carpet in order to obtain a higher return. BMT Tax Depreciation are specialists in maximising depreciation claims and can provide advice about any property scenario.

Our Property Tax Depreciation Calculator can help you to estimate the depreciation potential of your investment property.

Article Provided by BMT Tax Depreciation Pty Ltd.
Bradley Beer (B. Con. Mgt) is a Director of BMT Tax Depreciation, Property Depreciation & Construction Cost Consultants. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.