What is Depreciation?
Over time, things break. They wear out, they lose their lustre, and sometimes they just plain stop working. A ten-year-old car is generally going to have more problems than a brand new car. This is why older or second-hand things are cheaper than brand new things. An older thing is less useful than a new thing, so it is worth less. In Accounting terminology, this loss of value over time is ‘depreciation’, and there are standard methods of calculating it. For properties, it is referred to as ‘property depreciation’.
Understanding how an asset will depreciate is useful for many reasons.
- It’s useful knowledge if you intend to sell the asset later and recoup some of the cost.
- In some instances, depreciating assets can be claimed for tax reductions.
Claiming depreciation over the life of a long-term asset can be more beneficial than claiming the total cost of the asset immediately.
Depreciation is mostly used by businesses for income-producing assets. However, since investment properties produce income, investors can claim investment property depreciation. The wear-and-tear that an investment property experiences over time will reduce its potential value compared to what it would have been under perfect conditions.
There are two types of property depreciation. Plant and Equipment depreciation refers to items within the property such as ovens, dishwashers, and carpets. Building Allowance depreciation refers to the construction costs of the building itself.
Claiming Property Depreciation
All it takes for a property investor to claim property depreciation on their investments is a qualified quantity surveyor to inspect the property and prepare a report for your accountant. The inspection is required to meet ATO requirements.
A depreciation schedule MUST be prepared by a quantity surveyor. Real estate agents, Property Managers, and Valuers are not allowed to make a property depreciation estimate.
The cost of preparing a property depreciation schedule varies, but the savings mean it will more than pay for itself. And even better, the fees of using a Quantity Surveyor are also tax deductible.
If you haven’t been claiming property depreciation on your investment properties, your accountant can amend your previous tax returns for the two years prior.
This article contains information that is of a general nature only and has not taken into account your specific objectives, needs and financial situation. It is not intended to provide financial, investment, accounting, tax or legal advice, therefore you should seek advice from the respective qualified or licensed professional before making any decisions.