They say that a kitchen is the heart of a home and this couldn’t be truer than when a property is used for investment purposes.
For tenants, the kitchen may be a hub where the whole family comes together at the end of each day, but for landlords this part of a property has serious financial potential.
This is because the items contained within the kitchen of an investment property not only influence current rental returns received and potentially play a role in future capital growth, they also contain many of the most valuable depreciable items for which an owner can claim deductions.
Owners of income producing residential properties are entitled to claim capital works deductions for any of the structural items that commenced construction after September 15, 1987. They are also entitled to claim depreciation for any plant and equipment asset using their individual effective life as legislated and enforced by the Australian Taxation Office.
The kitchen in any residential investment property contains a significant number of depreciable items an investor can claim. Examples of structural items eligible for capital works deductions include the kitchen cupboards, bench tops, sinks, pantry and tiled floors. Common plant and equipment assets found in a kitchen include dishwashers, ovens, cook tops, range hoods, microwave ovens, light fittings, refrigerators, floating floors and garbage disposal units.
The following graphic highlights some of the deductions a property investor can claim in the first financial year within the kitchen of an investment property:
In total, depreciation deductions in the first financial year for items found in the above kitchen amount to $2,496. This is a significant amount which an investor can claim to help reduce their annual income tax.
Structural items found in the picture such as kitchen cupboards, benches and tapware will be claimed as capital works deductions at a rate of 2.5 per cent per year over 40 years. So while assets such as taps and sinks will only see a first year claim of $5 and $12 respectively, over 40 years these items will entitle the owner to a total of $680 worth in deductions. With a first financial year deduction of $560, kitchen cupboards and bench tops will equate to a total $22,400 in deductions over 40 years.
While a number of the plant and equipment assets found in the above kitchen (for example, the coffee machine, the knife block and the microwave) have a depreciable value of less than $300, these items will entitle their owner to claim their full value in the first financial year. This is because legislation allows rental property owners to claim an immediate write-off for any asset worth less than $300 in the year of the item's acquisition.
To ensure that the maximum depreciation deductions are claimed for any investment property, it is recommended that rental property owners seek the advice of a specialist quantity surveyor. They will complete a comprehensive tax depreciation schedule which includes a full site inspection of the property to ensure no deductions are missed.
During the site inspection, a specialist quantity surveyor will take measurements and photograph every depreciable asset found in the property. They will also look for less obvious renovations which may have been completed by a previous owner of the property.
Kitchens are popular rooms to renovate, but work that has been completed is not always obvious. Previous renovations such as new plumbing and electrical wiring can be easily missed if one does not seek expert advice. Quantity surveyors will also do the relevant searches necessary and consult with industry bodies such as councils to gather the information required to produce a depreciation schedule.
Once a comprehensive depreciation schedule has been completed, an investor can use the information outlined in the report to claim the deductions available with their accountant when they complete their annual income tax assessment. The deductions in a property add up and can have a significant impact on improving an investor’s annual cash flow.