Understanding tax depreciation schedules

Get ready to unearth the secrets of the tax depreciation schedule – an often-overlooked financial tool and unleash its potential to enhance your investment journey.

Investing in real estate can be a lucrative venture, but are you fully capitalising on the financial benefits that your property holds?

Enter the world of property tax depreciation schedules – a powerful tool that allows you to maximise your tax deductions and unlock hidden value within your residential investment properties.

While it may sound complex, understanding and harnessing the potential of a property tax depreciation schedule can significantly impact your cash flow, increase your returns, and make a tangible difference to your bottom line.

We’re going to break down property tax depreciation schedules, exploring what they are, how they work, and the compelling advantages they offer to savvy property investors.

What is a property tax depreciation schedule?

A property tax depreciation schedule is a detailed report prepared by a qualified property tax accountant that outlines the various tax depreciation deductions available for a specific investment property.

What is depreciation? This is the decline in the value of assets over time due to wear and tear or obsolescence.

The schedule breaks down all the depreciable components of your property, such as the building structure and the assets within it, and calculates the depreciation deductions that can be claimed on your annual tax return.

The property tax depreciation schedule includes two types of depreciation:

1. Capital works depreciation (also known as building write-off)

Capital works depreciation, also known as building depreciation, refers to the depreciation deductions claimed on the building’s structure and any permanent fixtures.  It includes components such as walls, floors, roofs, windows and doors, and plumbing and electrical systems.

The schedule typically includes a 40-year projection of the property’s annual depreciation rate and claim deductions for each component.

2. Plant and equipment depreciation

The plant and equipment depreciation encompasses removable assets like appliances, carpets, blinds, and air conditioning units.

Costs such as capital improvements, repairs and maintenance, and construction costs have a separate depreciation schedule of their own and are not included in the property tax depreciation schedule.

This information will help you as a property owner to maximise your tax deductions by accurately claiming depreciation expenses.

What are the benefits of depreciation schedules for your investment property?

A depreciation schedule offers tangible financial benefits to Australian investment property owners. 

It can help you make the most of your investment and enhance your overall financial position by –

Increasing your tax deductions

A depreciation schedule allows property owners to claim depreciation deductions on their investment property, thereby reducing their taxable income.

This can result in significant tax savings and potentially inject cash.

 Maximising your tax deductions

A comprehensive depreciation schedule ensures that all eligible depreciable assets and components of the property are identified and accounted for.  This includes both the building structure (capital works) and the assets within it (plant and equipment).

By maximising deductions, property owners can optimise their tax benefits. 

Improving cash flow

The tax savings from depreciation deductions can positively impact the property owner’s cash flow.

The additional funds can be reinvested in property maintenance, mortgage repayments, or further property investments. 

Enabling future planning

A depreciation schedule provides a long-term projection of depreciation deductions over the property’s effective life (usually 40 years).

This information assists property owners in forecasting their financial position and making informed decisions about their investment strategy. 

Managing compliance and accuracy

Engaging a qualified quantity surveyor to prepare the depreciation schedule ensures compliance with Australian Taxation Office (ATO) guidelines.

The tax accountant’s expertise and knowledge of legislation and regulations help ensure accurate calculations and claim substantiation, reducing the risk of audits or disputes with the tax authorities. 

Simplifying property valuation

Depreciation schedules can also serve as a useful tool when determining the value of an investment property.

Potential buyers may consider the tax depreciation report with the projected depreciation deductions when assessing the investment potential of a property.

When is the ideal time to purchase a tax depreciation schedule?

The ideal time to purchase a tax depreciation schedule for an investment property is typically within the financial year the property is acquired. Why?

So, you can start claiming depreciation deductions right away!

The earlier you start claiming deductions, the more you can potentially save on your annual tax return.

If you’ve already purchased an investment property and have never completed a property tax depreciation, it’s never too late to acquire one for an existing investment property.

Even if you have owned the property for several years, a depreciation schedule can still provide benefits by uncovering any previously unclaimed deductions and optimising your future claims

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Residential and commercial depreciation examples

We know this is a lot to take in and think this is a good opportunity to give you some examples to really help to cement the value and benefits of these tax-deductible depreciation schedules.

Please bear in mind, these are simplified examples, and actual depreciation calculations may vary based on the specific property, its value, and the effective life of the assets. Consulting with a tax professional will provide more accurate estimations based on your circumstances.

We’ll start with an example of a residential property’s depreciation.

Let’s say you own a residential investment property that you purchased for $500,000.

After engaging a qualified quantity surveyor to prepare a depreciation schedule, they determine that the building structure has a depreciable value of $400,000, while the plant and equipment assets within the property have a depreciable value of $50,000.

Over the effective life of the building structure (typically 40 years), you may be eligible to claim an annual depreciation deduction of $10,000 ($400,000 divided by 40 years).

Additionally, for the plant and equipment assets with an effective life of, let’s say, 10 years, you can claim a yearly depreciation tax deduction, of $5,000 ($50,000 divided by 10 years).

By claiming these depreciation deductions on your annual tax return, you can reduce your taxable income by $15,000, potentially leading to significant tax savings depending on your tax rate.

Here’s an example of commercial properties depreciation

Let’s consider a commercial property, such as an office building, that you purchased for $2 million.

After obtaining a depreciation schedule prepared by a qualified quantity surveyor, it is determined that the building structure has a depreciable value of $1.5 million, while the plant and equipment assets have a depreciable value of $200,000.

Over the effective life of the building structure (often 40 years), you may be eligible to claim an annual depreciation deduction of $37,500 ($1.5 million divided by 40 years).

For the plant and equipment assets with an effective life of, let’s say, 15 years, you can claim a yearly depreciation deduction of $13,333 ($200,000 divided by 15 years).

By incorporating these depreciation deductions into your annual tax return, you can potentially reduce your taxable income by $50,833. The actual tax savings will depend on your specific tax rate and circumstances.