What You Need to Know About Depreciating New Properties

When it comes to investing in property, one of the significant advantages that many investors overlook is the concept of depreciation. For new property owners, understanding how a depreciation schedule can unlock substantial financial benefits and maximise returns on investment. If you’re new to the world of property depreciation, this guide will walk you through everything you need to know.

What is Property Depreciation?

In simple terms, property depreciation is a tax deduction that allows property investors to offset the wear and tear of their investment property against their taxable income. Over time, buildings and their assets lose value, and the Australian Tax Office (ATO) recognises this depreciation as a legitimate deduction. By claiming these deductions, investors can reduce their taxable income and, consequently, their tax liability.

Why New Properties Offer Greater Depreciation Benefits

One of the standout advantages of new properties is the higher depreciation potential compared to older properties. This is primarily because:

 

Eligible Assets: New properties often come with modern fixtures, fittings, and appliances, all of which are eligible for depreciation.

 

Building Allowance: The ATO permits deductions for construction costs of buildings. For properties built after 16 September 1987, this allowance can be claimed for up to 40 years. As new properties fall within this timeline, the building allowance deductions tend to be higher.

 

Maximised Tax Deductions: The combination of plant and equipment depreciation (fixtures and fittings) and capital works depreciation (building structure) ensures that new property owners have access to more significant tax benefits.

How is Depreciation Calculated?

Depreciation is calculated based on two main components:

 

Capital Works Depreciation (Division 43)

This refers to the deductions for the structural elements of the property, such as walls, roofs, and flooring. The rate is generally 2.5% of the construction cost per annum and is claimable over 40 years.

Plant and Equipment Depreciation (Division 40)

This covers assets like air conditioning, carpets, and appliances. The depreciation rate depends on the effective life of each asset as determined by the ATO.

 

To ensure accurate calculations, it’s recommended to engage a professional quantity surveyor who can prepare a comprehensive depreciation schedule for your property. If you’re considering this, companies like Washington Brown specialise in delivering tailored depreciation schedules that help investors maximise their claims.

Common Misconceptions About Depreciation

“Only Older Properties Can Be Depreciated”

This is a common myth. While it’s true that older properties might have limited depreciation potential, new properties come with a wealth of opportunities for deductions, thanks to modern construction standards and newer assets.

“I Can Calculate Depreciation Myself”

While some aspects of depreciation might seem straightforward, the calculations are often complex and require a deep understanding of tax laws. Errors in self-calculated depreciation claims can lead to audits or penalties.

“Depreciation Only Benefits High-Income Earners”

While higher-income earners may see more immediate tax benefits, depreciation can significantly improve cash flow for investors at all income levels.

The Importance of a Professional Depreciation Schedule

A depreciation schedule is a detailed report that outlines all the deductions you can claim on your property. Prepared by a qualified quantity surveyor, this schedule ensures you’re claiming the maximum deductions available while adhering to ATO guidelines. For new properties, the schedule often results in higher claims due to the untouched nature of assets and construction.

 

Engaging an experienced quantity surveyor, such as Washington Brown, can save you time and effort while ensuring compliance with tax regulations. Their expertise in property depreciation ensures that no deductions are overlooked, ultimately putting more money back into your pocket.

Benefits of Claiming Depreciation

The financial benefits of claiming depreciation on new properties are numerous:

 

Increased Cash Flow: By reducing taxable income, investors can retain more of their rental income.

 

Higher Investment Returns: Depreciation claims can offset the costs of property maintenance and management, improving overall profitability.

 

Tax Efficiency: Depreciation is a non-cash deduction, meaning you don’t need to spend additional money to claim it.

Key Takeaways for Investors

For anyone investing in new properties, depreciation is an essential consideration. To maximise the benefits:

 

  • Familiarise yourself with ATO guidelines on property depreciation.
  • Engage a qualified quantity surveyor to prepare a depreciation schedule.
  • Keep records of all expenses and improvements related to the property.

 

Whether you’re a seasoned investor or a first-time buyer, understanding depreciation can significantly impact your investment’s financial success. Remember, the key to leveraging this tax deduction is accurate and thorough reporting. With the right advice and professional assistance, you can ensure you’re not leaving money on the table.

In conclusion, the financial advantages of depreciating new properties are undeniable. By claiming depreciation, you can improve cash flow, reduce tax liabilities, and make the most out of your investment. For expert guidance and tailored depreciation schedules, turn to trusted professionals like Washington Brown to help you navigate the process and maximise your returns.