Depreciation and property investment

The taxable purpose of an investment property will usually be to produce assessable income. As such, as part of their yearly taxation return, an owner can make capital works deductions and claim depreciation allowances which represent the decline in value of depreciating property assets over time.

Capital works deductions can be claimed on the building and various capital works and structural improvements at either 2.5% or 4% per year, provided construction commenced after 18 July 85 and capital improvements were commenced after 26 February 1992. The deduction rate changed from 4% to 2.5% from 15 September 1987.

Items of plant and equipment (depreciating assets) such as floor coverings, window coverings, stoves, hot water systems, rainwater tanks, security systems are depreciated at differing rates, depending upon their effective life.

 As a general rule, newer properties will attract higher depreciation allowances however virtually every property can be depreciated to some extent.

These deductions for depreciation are offset against income generated by the property to reduce the owner's tax liability.

It follows therefore that property investors should take every legitimate step available through the taxation legislation to maximize their capital works and depreciation deductions - the obvious benefit of taking advantage of the full extent of these entitlements is increased cash flow.

Research shows that a large number of property investors fail to achieve the optimum outcome from depreciation deductions. Some estimates put this figure as high as 70-80%. The legislation is complicated, and a good option for ensuring that you don't overlook an opportunity to make a claim for an item, and that you do so correctly and avoid potential penalties, is to have a tax depreciation schedule prepared professionally.

There are two depreciation methodologies available - the Prime Cost and Diminishing Value methods, and a depreciation schedule can provide a comparison between both options to highlight the most cost-effective result for your particular situation.

Costs involved for a professionally-prepared tax depreciation schedule vary widely so shop around, but typically the cost is more than offset by higher claims for depreciation, the fee itself is tax-deductible and the process delivers the reassurance that the documentation is compliant with current tax law.

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