What is a Depreciation Schedule: A Beginner’s Guide

In Professional help by Jeff OsborneLeave a Comment

Did you know that 70% of investors in Australia don’t buy a tax depreciation schedule for their investment properties?

Depreciation schedules are one of the most effective but underused tools available to a property investor to maximise their returns.

When you think about the fact that depreciation is the second-highest tax deduction on your property after interest on your loan, it’s unbelievable how much investors are leaving on the table.

But what is a depreciation schedule exactly?  And how can you benefit from it?

Here’s a break down of everything you need to know about tax depreciation schedules so that you can maximise the tax benefits available to you through your investment property.

What Is Tax Depreciation?

Before delving into what is a tax depreciation schedule is, it’s important to understand property tax depreciation.

Depreciation is a non-cash deduction that allows you to claim a portion of the cost of your property over its useful life.

To claim depreciation, you need to order a depreciation schedule from a quantity surveyor.

As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.

The Australian Tax Office (ATO) allows property investors, who generate income from their investment property, to claim the property depreciation as a tax deduction.

Put simply; depreciation is the decrease in an asset’s value over time due to natural wear and tear. Property depreciation can provide a significant tax benefit for investors, as the Australian Taxation Office (ATO) effectively allows you to offset the cost of this wear and tear against rental income.

What sets a depreciation claim apart from other rental expense tax deductions for your investment property is that it is a non-cash deduction – you don’t have to spend any money to claim it.

The structural component of a building usually depreciates at a fixed rate over a long period of time—usually 40 years. In contrast, plant and equipment assets depreciate according to their effective lives as they generally wear down faster than the building itself.

 There are two main types of property depreciation: capital works deductions (Division 43) and plant and equipment (Division 40) deductions.

Investors can claim a capital works deduction for the building itself, as well as plant and equipment depreciation deductions for assets within the building, such as furniture, fittings, and appliances.

Types of depreciation deductions in the space of property investing…

Division 43 – Capital Works Deductions

Division 43 Deductions refer to the depreciation of the structure of the building. The structure of a residential building, if constructed after September 1987, generally has an effective life of 40 years.

You can claim a capital works deduction on construction costs, too.

Division 40 – Plant and Equipment

The term “plant and equipment” refers to the fixtures and fittings that are found within the building.

Plant and equipment depreciation on these easily removable assets includes items such as carpets and air conditioning units.

What Are Tax Depreciation Schedules, and How Can They Change Your Tax Return?

Simply put, depreciation schedules are reports detailing the tax depreciation deductions you can claim on your investment property.

Claiming these tax-deductible expenses involves identifying the value of an investment property, what you estimate construction costs to be, and all its fittings and fixtures.

The purpose of a tax depreciation schedule is to outline the value of both your Division 40 and Division 43 assets as well as how much it has depreciated and will depreciate. This will give you a clear idea of how much you can claim for tax depreciation.

A tax depreciation schedule provides a breakdown of the depreciation deductions you can claim for an investment property and eligible plant and equipment assets. It includes the original value, the estimated effective life, and the depreciation rate for both the structural components and the plant and equipment assets.

The tax depreciation schedule document is typically prepared by a professional quantity surveyor who’s a member of the Australian Institute of Quantity Surveyors. Qualified quantity surveyors will inspect your investment property and assign a value to each asset.

All sounds good but complicated!? Well the good news is that GoReal organise and pay for a Depreciation Schedule if you purchase an investment property through us, helping you to maximise the tax deductions available on your brand new property.

Barbara Hutson

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