A Guide to Property Depreciation and How Much You Can Save

Abstract

Here's a basic guide to property deprecation:What is property depreciation?Property depreciation is a tax break that allows investors to offset their investment property's decline in value from their taxable income. Claims on property depreciation will fall into one of two categories:Capital works allowance - covering the value of the building's structurePlant and equipment depreciation - covering the value of removable itemsAustralian law allows investors to claim tax deductions on both the decline in value of the building's structure and items considered permanently fixed to the property and the decline in value of plant and equipment assets found within it. If the asset cost you $10,000, you purchased it on July 1 and its effective life was five years the following equation would apply:10,000 x x 40% meaning you could claim the following amounts:Year 1: Base value $10,000 x 40% = claimable amount: $4000Year 2: Base value $6,000 x 40% = claimable amount $2400Year 3: Base value $3600 x 40% = claimable amount $1440Year 4: Base value $2160 x 40% = claimable amount $864Year 5: Base value $1296 x 40% = claimable amount $518How does depreciation work on investment propertiesIn Australia, when you purchase an investment property you're treated as having bought a building as well as the various separate items inside, which the ATO calls 'plant'. According to Terry Aulich, Chief Executive Officer of the Australian Institute of Quantity Surveyors, while accountants can offer general advice on other aspects of tax depreciation, construction costs and property depreciation are domains that require highly technical expertise. "Quantity surveyors are specialists in the accurate measurement of construction costs with a view to maximising a client's financial position in relation to their property assets. Only a fully-qualified quantity surveyor brings the appropriate education, experience and training to provide reliable figures upon which to base a property tax depreciation schedule," says Terry. How much does a depreciation schedule cost and how long do they take?The cost of preparing a tax depreciation schedule varies according to a number of factors, including the type of property you've purchased, its location and size. How much will I save?Each property is different and many factors must be considered when preparing a property depreciation schedule.