If you have trouble getting your head around the concept of depreciation of houses and apartments, you are not alone.
Property prices may be on the way up throughout Australia, but that won’t affect how much tax depreciation you can claim on your investment, even if it is worth more now than you paid for it.
Tyron Hyde, Director of quantity surveyor Washington Brown, says he doesn’t think values will drop any time soon and, with the RBA re-affirming it doesn’t intend to increase interest rates for at least three years, more investors are returning to the market.
Washington Brown General Manager Peter Foldes says an indication of how active investors are in Australia is the 16,000 tax depreciation reports the firm has completed for clients in the past financial year.
Foldes, speaking on a webinar hosted by hotspotting.com.au, says that based on those reports investors are most interested in New South Wales. “It doesn’t surprise that New South Wales might be the leading state, but Queensland is also very prominent and I think we’re going to see more of that as we go forward,” he says.
With more investors entering the market, Hyde says it’s a good time to look at what can and can’t be claimed as a tax deduction on an investment property.
“Depreciation is the wear and tear on an investment property that you as a property investor can claim,” he says.
“The property must be income-producing so you can’t claim a depreciation deduction on your home and the bulk of the depreciation claim is based upon the actual construction costs of the property.”
Unless they are buying a new property, most investors don’t know how much it cost to build the property they have bought. A quantity surveyor will do a depreciation report which works that out and this is used for claiming a tax deduction.
Where some investors get caught up, says Hyde, is they don’t fully understand the changes to claiming tax depreciation on investment properties which were introduced in 2017.
Before that all residential investors could claim tax depreciation on a property regardless of its age and value, as well as the plant and equipment inside it such as ovens and dishwashers.
The change in laws mean that unless they paid to install it, buyers of investment properties can no longer claim on plant and equipment.
“Nothing changed about claiming depreciation on construction but it changed on plant and equipment,” Hyde says.
“So, regardless of whether it’s one day old or a 50-year-old property, you can no longer claim that appreciation of the plant and equipment in the building (if someone else has previously owned it).”
Hyde says there are seven crazy things about property tax deductions, which he doesn’t believe make much sense.
1.Buying brand new property
If someone buys off-the-plan and on-sells it before it is completed, the new owner can no longer claim plant and equipment on the investment property, because although nobody has used the house yet, they are technically the second owner.
2. It affects only residential property
Owners of commercial investment properties, whether new or secondhand, can claim tax depreciation on plant and equipment.
“It didn’t make a lot of sense to me,” Hyde says, “but the Government felt that residential property was where the most overclaiming was going on.”
3. Mixed-use properties have mixed approach
If an investor buys an existing property which is a retail shop on the bottom level and residential on the top, they are able to claim plant and equipment depreciation only on the retail portion of the building.
4. Air conditioning costs are split
If a second-hand investment property has a ducted air conditioning system you can claim depreciation on the ducts as part of the building but the rest of the unit, the knobs, switches etc are considered plant and equipment and no longer eligible for a tax deduction.
5. Bigger is better
Banks such as Macquarie or superannuation funds are able to package up thousands of second-hand units and can still claim depreciation on plant and equipment although individual taxpayers can’t.
6. Renovating to sell
In a second-hand property the owner may renovate it substantially to sell and even if no one moves in or uses the property until the next owner has bought it, the new owner cannot claim a tax deduction on the renovations and new plant and equipment because it wasn’t bought and installed by them.
7. Not every property needs an inspection
Hyde says some firms convince investors a quantity surveyor needs to visit the property to do a tax depreciation report, but in fact that extra expense is not always necessary.
“There’s still lots and lots of properties that need to be inspected,” he say. But he says a good quantity surveyor will first analyse the property and give you a depreciation plan as to whether it should be inspected or not.
Sometimes the quantity surveyor is already aware of the property in terms of units and an inspection is an unnecessary expense.