Property investors who don’t take advantage of depreciation laws are missing out on worthwhile coin

No argument – making a buck is harder these days – it’s a jungle out there, folks, and survival depends, for mine, on working longer and smarter.

Part of any worthwhile strategy can mean extracting the best out of what we already have.

When it comes to property, more than 90% of investors, according to recent survey results, are the “lock and leave” type – or the passive investor profile.

That laissez-faire approach sometimes extends to overlooking less-obvious ways of decreasing the costs of holding property. Surprisingly, one of those most often overlooked is depreciation.

Brad Beer, of BMT Quantity Surveyors, sent through an interesting note the other day about his research, which affirms that 80% of property investors are not taking advantage of the property depreciation laws – basically missing out on some worthwhile coin, if you ask me.

Brad reckons that on average, investors find between $5,000 and $10,000 as a first full-year deduction.

Owner-investors are seemingly au fait with the tax advantages of negative gearing, but according to BMT, the depreciation benefits of property are less understood.

Many buyers of new investment property cite the tax benefits of depreciation as a reason to buy new. And while this should not be the main consideration for purchasing, those benefits can result in a significant boost to cashflow.

But you can also claim depreciation on renovated properties. You just need to know what you are doing. In this regard, it pays to employ a quantity surveyor who is trained in the area of tax depreciation. Good advice can make a difference to investor decisions both prior to and after purchase, and can impact greatly on the long-term quality of the investment. It really is money for jam.

Briefly, let’s just look at one straightforward example of how much money could be involved. In fact, you can even try out one of the simple depreciation apps for yourselves – there are dozens out there. But by way of example, a $500,000 new Brisbane apartment, built to a high standard of finish, could net the buyer about $100,000 in the first 10 years, with $14,000 paid after the first year, if using the diminishing value method.

Again, expertise is key. For new property, a quantity surveyor’s work will cover a 40-year period – so there are even more savings available beyond the first 10 years.

For those who are new to the investor game, or are thinking about it, the potential of both new and old properties to attract depreciation benefits, which the owner can claim as a tax credit, can be somewhat of an unknown quantity. And given the widely held perception that older properties will attract no claim, it really is worth having an expert look into any property scenario.

For new property you’ll need a valuation of the building from a quantity surveyor who is registered with an ATO accreditation.

And for property that is not new, you’ll need a construction date and other information so that a depreciation schedule can be drawn up.

A property depreciation report will make life easy for accountants and should include the following technical and service aspects:

• A site inspection
• A list of values for fittings, fixtures and the structural elements of a building
• Calculated deductions projected for up to 40 years
• Cover any extensions or renovations – even those of a previous owner
• Accelerated depreciation for assets that qualify
• 100% deductions for immediate write-off for items that qualify
• Deductions split based upon applicable ownership ratios

The report fees, of course, are 100% tax-deductible.

Yes, property has had a bad rap of late; but as we reported recently there is some good news afoot, especially in Brisbane, where the market is starting to turn. And in spite of lingering negativity and a changing prognosis for the way forward for the property market, investment property that is well-located and actively managed remains, in my opinion, one of the best ways for everyday Australians to generate wealth, with its attractive combination of capital growth, rental income and generous tax breaks.

More than ever, it is important to pay attention to detail more and make sure that we maximise whatever advantages are available.