Now is a better time than any to rehash this information to help explain property depreciation, some key facts are below to help guide you and ensure you achieve the best possible results from your investment property.

What is property tax depreciation?

As an investment property gets older, the building’s structure and the assets within it wear out – it depreciates. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a tax deduction.

Meaning that owners of an income-producing property may be eligible for thousands of dollars in depreciation deductions; and claiming depreciation means you could pay less tax.

Who can claim depreciation?

All types of income producing properties have substantial taxation benefits. The owners of both new and older investment properties can claim depreciation benefits which help to reduce tax liability.

A common myth is that older properties will attract no claim; however, this is not the case. It’s worth making an enquiry about any property, regardless of its age.

What is a tax depreciation schedule?

A tax depreciation schedule is the best way to ensure you claim maximum depreciation deductions. It covers all deductions available over the lifetime of a property, including capital works and plant and equipment assets. The schedule provides a summary of both methods of depreciation and is 100 per cent tax deductible. During the FY 2018/19, residential property investors logged an average first year deduction of almost $9,000.

What depreciation legislation is important to know?

Legislation passed in November 2017 brought about major changes to residential plant and equipment depreciation claims. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9 May 2017, cannot claim deductions for previously used plant or equipment assets. However, those owners can still claim brand-new plant and equipment depreciation on assets they purchase and install in the property once it is income producing.

If your rental income has changed, your accountant or a tax specialist from BMT can help you find ways to maximise negative gearing and tax deductions for property expenses in the lead-up to lodging your tax return on July 1.

MAY 2020

Get the value of our experience today by booking a free rental appraisal with your local real estate expert.

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A guide to tax depreciationAs the rental market changes in the wake of COVID-19, it’s beneficial for property managers and investors alike to better understand tax depreciation. By learning about depreciation and how to claim it, you can help reduce your taxable income and improve your available cash flow.

Speak to your local LJ Hooker Property Manager to find out more about the services of our partners BMT Quantity Surveyors

Rental expenses to claim at tax timeGenerally, you can claim an immediate deduction against your current year's income for expenses related to the management and maintenance of your investment property. If your property is now negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income.

You can claim a tax deduction for expenses only if you as the property owner have paid it, and it has not been paid by the tenant. Expenses you may be entitled to claim include:

• advertising for tenants• body corporate fees and charges• council rates• water charges• land tax• cleaning• gardening and lawn mowing• pest control• insurance (building, contents, public liability)• interest expenses• pre-paid expenses• property agent's fees and commission• repairs and maintenance• some legal expenses

Interest expenses

If you take out a loan to purchase a rental property, you can claim a deduction for the interest charged on the loan or a portion of the interest. However, the property must be rented out or genuinely available for rent in the income year you claim a deduction. You can claim the interest charged on the loan you used it to purchase the rental property, buy a depreciating asset, make repairs to the property or finance renovations. You can also claim interest pre-paid up to 12 months in advance.

Pre-paid expenses

Pre-paid expenses are those provided for services extending beyond the current income year, such as payment of an insurance premium on 1 January that provides cover for the entire calendar year. You can generally claim an immediate deduction in the current income year for pre-paid expenses of less than $1,000 or expenses of more than $1,000 where the service period is 12 months or less. Otherwise, the claim on the prepayment can be spread over two or more years.

Repairs and maintenance

You may be able to claim a full deduction for the cost of repairs and maintenance in the year that you incur them if the expense directly relates to wear and tear or other damage that occurred as a result of renting out property, and the property continues to be rented on an ongoing basis. Repairs mean working to make good or remedy defects in, damage to or deterioration of the property. While maintenance means work to prevent deterioration or fix existing deterioration.

However, you can't claim a deduction for the total cost of improvements to your rental property in the year you incur them. An improvement is anything that makes an aspect of the property better, more valuable, more desirable or changes the character of the item on which works are being carried out. Capital improvements though, such as remodelling a bathroom or adding a pergola, should be claimed as capital works deductions.

Legal expenses

You can claim the cost of the following as income tax deductions:

• evicting a non-paying tenant• expenses incurred in taking court action for loss of rental

income• defending a damages claim regarding injuries suffered

by a third party on your rental property

However, you can't claim the cost of solicitor fees or legal costs associated with defending the title or resisting land resumption; these can be claimed as capital expenses or borrowing expenses.

For more information, please visit the ATO website.

Source: ato.gov.au