One of the misconceptions many investors have when purchasing an older property is they think they won’t benefit from depreciation deductions.
While legislation outlines some restrictions which the Australian Taxation Office (ATO) will enforce regarding what deductions investors can claim, it’s important not to dismiss obtaining a depreciation schedule simply because the property purchased was constructed some time ago.
There are a number of reasons why depreciation is just as relevant for owners of older properties as it is for those who purchase newly built properties.
Let’s look at three reasons why it’s worthwhile seeking advice from a specialist quantity surveyor to maximise depreciation claims.
1. There’s two elements to a depreciation claim
One reason investors think they are ineligible to claim depreciation on an older property is because of rules the ATO enforce regarding claiming capital works deductions based on the properties construction commencement date.
The rules state that owners can only claim deductions for the capital works component if construction commenced after September 15, 1987. However, the capital works component of a depreciation claim, which relates to the wear and tear of the structure of the building, is just one element which entitles owners of rental properties to deductions.
The second element is the mechanical or removable fixtures and fittings (also known as plant and equipment assets). The construction commencement date has no impact on whether depreciation can be claimed for these assets.
The ATO provide an effective life for more than 6,000 individual assets which can be used to calculate the depreciation of these items. The effective life will reset from the date of settlement. Two examples of assets which can be depreciated in residential properties are carpets and hot water systems.
2. Older properties have often been renovated
While the above rules regarding capital works deductions apply, many properties built prior to 1987 will have been renovated at some point in time since their original construction.
So long as a renovation was completed within the legislated dates, it will entitle an investor to capital works deductions, even if the work was completed by a previous owner.
Often renovations are not obvious, such as new plumbing or electrical wiring, so even if you can’t see any evidence of work being done, it is best to seek advice from a specialist quantity surveyor.
3. Owners of properties built before 1987 claim $4,899 on average in the first year
It’s always interesting to see what other investors with similar scenarios have been able to claim in depreciation deductions.
Data shows that during the 2015-2016 financial year, owners of properties constructed prior to 1987 claimed an average of $4,899 in depreciation deductions in the first full year alone.
Although properties constructed between 2012 and 2015 see investors claim a much higher average of $12,316 in deductions in the first full financial year, depreciation can still play a role in helping owners of older properties to reduce their taxable income and to help offset the costs involved in holding a property.
At the end of the day, cash flow is vital for property investors, so it’s always better to ask the question and to request a depreciation schedule which could result in more cash in your hand, than miss out altogether.