What is Tax Depreciation Report?
A tax depreciation report details the decline in value of your investment property’s assets over time. This isn’t just about the wear and tear you can see; it includes the building structure itself, as well as various fixtures and fittings like ovens, carpets, air conditioners, and even landscaping.
Why is this so important?
Because it translates directly into valuable tax deductions. Think about it: these assets are constantly losing value, and the Australian Taxation Office (ATO) recognizes this. By having a professional quantity surveyor prepare a depreciation report, you can accurately calculate these losses and claim them as deductions, ultimately reducing your taxable income and potentially putting more money back in your pocket.
Here’s why getting a report before June 30th is key:
The sooner you have the report, the sooner your accountant can incorporate these deductions into your tax return for the current financial year. Missing the deadline means missing out on these potential savings for this year.
While claiming depreciation on your investment property generally offers significant tax benefits, there are also some potential downsides to be aware of. Here’s a breakdown of the pros and cons:
Pros of Claiming Depreciation:
Reduced Taxable Income: This is the primary benefit. By claiming the decline in value of your property’s assets, you reduce your overall taxable income, leading to lower income tax payable.
Increased Cash Flow: Lower taxes mean more money in your pocket, improving your cash flow from the investment property. This can be used for mortgage repayments, property maintenance, or further investments.
Recognizing Actual Wear and Tear: Depreciation acknowledges the reality that assets within a property do wear out and need eventual replacement. Claiming it helps offset the future cost of these replacements.
Cons of Claiming Depreciation:
Capital Gains Tax Implications: When you eventually sell your investment property, the ATO will reduce the cost base of your property by the amount of depreciation you’ve claimed (or could have claimed). This will increase the potential capital gains tax you’ll have to pay upon sale.
Cost of Obtaining a Depreciation Report: Engaging a qualified quantity surveyor to prepare a depreciation report involves an upfront cost. However, this cost is usually tax-deductible and the potential tax savings from the report often outweigh the initial expense over time.
Complexity: Understanding and correctly claiming depreciation can be complex. It requires a detailed report and careful attention to the ATO’s guidelines. You’ll likely need to work closely with your accountant.
In Conclusion:
For most investment property owners, the pros of claiming depreciation outweigh the cons. The immediate tax benefits and increased cash flow are valuable advantages. While the capital gains tax implication is a factor to consider in the long term, the tax savings accumulated over the years often compensate for this. However we suggest you discuss this with your accountant so you can evaluate what is best for your situation.
What’s the next step?
If you think Tax depreciation will be beneficial, we suggest that you obtain a tax depreciation report for your investment property, I strongly encourage you to do so before the end of financial year so you have the report ready by the time of Tax lodgment. Please feel free to discuss this with your accountant if this is a right option for your circumstances.
The information provided is for general education purposes only and is not intended to constitute specialist or personal advice. This newsletter has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should consider the appropriateness of the advice to your own situation and needs before taking any action. It should not be relied upon for the purposes of entering into any legal or financial commitments.
