Tax Depreciation on your Rental Property
Depreciation. It’s one of those icky words you never want to hear in relation to your own assets, isn’t it? But property investors must understand the ins and outs if they’re serious about reducing unnecessary financial losses in relation to their rental properties. Take it from this property buyers agent that there are a few things you need to know with regards to depreciation and your rental property!
Did you know that owning an investment property gives you the ability to write off (or depreciate) the cost of capital assets included within the property as a deduction from your overall income from the property? Basically this means you can write off the depreciating value against the rent income you receive. But let’s take this back to basics.
What is depreciation?
Depreciation is a term you’ll often hear that is used to describe the decline in value of an asset over time. For example, we all know that cars depreciate over time – they will never be valued at their initial purchase price again once those tyres touch the asphalt. The same goes for your assets within an investment property.
Depreciation of assets within an investment property is based on what is known as the ‘useful life’ of the asset (otherwise known as the number of years it is expected to be in use). But who determines the useful life of the asset?
Calculating the useful life of your assets
Firstly, you can turn to the ATO. Every year, they produce tables of analytic data estimating the life of an asset on a comprehensive list of items such as ovens, heaters, blinds and so forth.
However, if you happen to disagree with the ATO’s determination on your selected list of assets, you can self-assess the useful life of the asset yourself. Just be ready to prove your position to the ATO with evidence of predicted useful life.
Assets that can be depreciated over time
Remember that depreciation is based on the acquisition cost of the item – the amount you paid for the item at time of purchase. Depending on the type of asset, this may vary in value due to quality, brands, cost of installation and so on. A good example of this is carpet, which can vary in both price and quality; this is taken into account however and will be reflected in the depreciation allowance.
As you prepare your information for the tax agent, property investors can add the following items to their list of depreciating assets:
- Clothes dryers
- Blinds and curtains
- Air conditioners
- Hot water systems
Restrictions on claims
Back in May 2017, restrictions were placed on the depreciation of second-hand assets. Essentially, only those carrying on a business of property investing or excluded entities (such as a company) can claim on depreciation of second-hand plant and equipment in rental premises used for residential accommodation; this applies to second-hand plant and equipment on or after 7:30pm (AEST) on the 9th May 2017, unless they were acquired under a contract that was entered into before this time.
Also, if you have had plant and equipment installed on or after 1 July 2017, you will not be able to claim, particularly if you’ve ever used it for private purposes.
I know from experience that the dos and don’ts, the cans and cannots of depreciation are a major source of confusion for property investors. I encourage clients who are in a position to claim on depreciating assets to have a chat to their tax agent, as they will be able to advise you with clarity on what you’re entitled to claim and what you’re not. Considering the ATO has doubled down on excessive or incorrect deductions on rental properties, now is the time to get your claims correct the first time around with help from a professional.
If you have any questions about depreciation for this property investment buyers agent, give me a call on (02) 8916 6172 or email the team at firstname.lastname@example.org.