This Settles It: Get a Depreciation Schedule on Purchase

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Wednesday, April 13th, 2016
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Depreciation Schedule
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Purchasing a rental property can be a daunting process for a first-time investor as there is so much to think about.

Real estate agents will tell you it’s all about ‘location, location, location’ and to focus on finding an appropriate property within budget close in proximity to local services and facilities with a record of historical growth. They may also point out existing rental properties available on the market which are achieving a yield that provides an immediate and positive return on your investment.

For some, the property purchased may depend on the amount of money a lender, whether it be a mortgage provider or bank, is willing to loan you as well as what personal savings or equity you are able to put toward the purchase.

Once a suitable property has been bought, the focus soon switches to enlisting a property manager who can find the most suitable tenant. For many first time investors, this can be the most overwhelming task. After buying the property, they want to ensure whoever they lease it to will look after the property and be able to afford the weekly rent and pay on time.

Of course, the underlying goal which drives an investor’s decisions throughout the whole process is for their new property purchase to earn them an income. Cash flow is key for investors., so it is surprising that so many investors postpone obtaining a depreciation schedule or fail to claim depreciation at all.

Obtaining a depreciation schedule immediately on settlement is perhaps the most important decision an investor can make. Even if the end of financial year is less than a month around the corner, the deductions found will have a significant impact on an investor’s cash flow.

To explain, let’s take a look at a scenario in which an investor recently purchased a $680,000 property on the June 10 (20 days before the end of financial year).

The investor contacted a specialist quantity surveyor to perform a site inspection to assess the property and to discover all of the plant and equipment assets contained within the property. The following table is a summary of their findings:

deductions propoerty

During their inspection, the specialist quantity surveyor found a number of plant and equipment assets with a value less than $300. Items valued less than this amount entitle the owner to an immediate write-off and therefore can be deducted in full in the first financial year.

This means the owner could claim $1,358 in total first year deductions for the bathroom accessories, door closers, exhaust fans, garbage bins and smoke alarms found in this property scenario.

The specialist quantity surveyor also found a number of plant and equipment assets with a value less than $1,000. To maximise deductions for the shorter period of ownership for the investor; assets such as the blinds, curtains and light shades were all added to the low-value pool.

Low-value pooling is a method which allows assets to be depreciated at an increased rate of 18.75 per cent in the first financial year claim (no matter how long the property has been owned) and at a rate of 37.5 per cent for each year thereafter. Items which are considered part of a set (for example blinds and curtains) can also be added to a low-value pool if each individual item in the set is valued less than $1,000. Assets eligible for the low-value pool therefore resulted in an additional $1,578 in first-year deductions for this owner.

The remaining plant and equipment assets found (the split system air conditioner, carpets, cook tops and the hot water system) were all claimed based on their individual effective life as set by the Australian Taxation Office. This resulted in a deduction of $353 for the owner.

The structural portion of the property (for example the bricks, mortar, walls, flooring, wiring and kitchen cupboards) will all depreciate at a rate of 2.5 per cent per year and deductions are calculated based on the original cost of building construction and pro-rated for the portion of the year the property was available for rent and income producing.

The deductions for the building structure (or the capital works component of the depreciation claim) in this scenario resulted in a first year depreciation deduction of $545 for the owner.

Altogether, this means the investor was able to claim $3,834 in depreciation after only owning the investment property for 20 days.

This example shows that even if an investor has only owned and rented a property for a few weeks of a year it is worthwhile claiming depreciation. By obtaining a schedule to maximise depreciation for a property purchased and settled in the lead up to the end of financial year, investors can recoup some of their costs and provide an immediate boost to their cash flow to assist with any costs involved in holding the property.

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