Maximise your claim: Overlooked property deductions for investors

Many investment property owners may be missing out on valuable property depreciation entitlements, simply by not being up-to-speed on what is and is not depreciable.

Generally speaking it seems that many property investors may not be claiming their full tax entitlements, most likely because the range of items that qualify can be unexpectedly diverse. Examples may surprise many taxpayers. These can even include items such as kids’ cubby houses or even garden gnomes, as long as the item forms part of the investment property.

But before you go out and splash cash on an upmarket Dopey or Sneezy, remember that conditions usually apply. The ability to access the depreciation is limited to investors, and certain conditions and limitations may also have to be considered.

A gas hot water system, with 5 years still left on its 15-year effective life, can have its leftover value deducted in the financial year in which it is scrapped

HOW DO YOU MAKE A CLAIM FOR A DEDUCTION?

Broadly speaking, depreciation and amortisation allow property investors
to deduct a portion of the original cost
of equipment and capital works on an investment property every financial year over the item’s “effective life”.

This is the time over which the ATO or the legislation deems the depreciable asset will lose its value. Basically, the building and its assets are getting older and wearing out, so the ATO allows investors to claim part of their cost each year as a deduction.

Note special statutory rules apply to building works deductions (see below).

TYPICAL DEPRECIATION ITEMS THAT CAN BE DEDUCTED

Rental property investors can depreciate hundreds of household items for tax purposes, including dishwashers, dryers and even built-in coffee machines.

Other eligible but often overlooked items include:

  • pumps attached to spa baths
  • free-standing spas
  • children’s cubby houses, and
  • water tanks.

DEPRECIATION AND DEDUCTION TIPS AND TRICKS

Other tax depreciation considerations include:

  • Beware of initial repairs on new purchases of investment properties: Look at your renovations to determine if they would be an initial repair to improve the property (and therefore depreciable) or simply repairs and maintenance (and thus deductible in the current period).
    The ATO has been on the look-out for initial repairs erroneously claimed fully as a deduction in the year in which the cost was incurred.
  • Keep all your records: Keep all invoices and do not claim personal labour costs
  • Claim it all: Ensure the full and correct effective life of all depreciable items is claimed (speak to us if necessary)
  • Building works deductions: Some investment buildings are eligible for a 40 year depreciation based on actual or historical construction cost. This is typically referred to as a capital works deduction.
    This applies to buildings built after 1985, however extensions and alterations to older buildings may also be eligible to be claimed over 40 years. Note that:

    • new kitchens, bathrooms, carports, garages, patios and barbecue areas built after September 1985 in older properties may be eligible for a capital works deduction
    • swimming pools built after February 1992 may be eligible for depreciation as structural improvements
  • Get a depreciation schedule: Provided no changes occur to the assets of an investor on an investment property, a tax depreciation schedule is only required once during the life of an investor’s ownership of the investment property — a qualified quantity surveyor can provide this schedule.
  • Scrapped assets: There is also the option to claim a deduction for the “residual value” of depreciable assets that are scrapped and replaced.
    A gas hot water service for example, with 5 years still left on its 15-year effective life, can have its leftover value deducted in the financial year in which it is scrapped.

For any assistance with the above, please contact this office.

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