Claiming depreciation on an investment property - Yes or No?

LPorco Rosso on 08/08/2014 - 11:46
Last edited 08/08/2014 - 21:18

Hi Everyone,
End of last year we bought our first investment property. It's tax time and I had a chat with a few of my friends who have investment properties. Some of them recommend getting a depreciation schedule done and claiming tax deductions when doing the tax returns is a must. Claiming tax deduction would seem like a win but some friends suggest otherwise! They say that if I claim depreciation on the investment property now, it will be added on to the capital gains tax (if and) when I sell the property. They say this from their experience where claiming the depreciation wasn't much beneficial to them and was easily forgotten but the sting they got when they had to sell their property was painful.
So I'm not sure now if it is a good idea to claim depreciation on the investment property or not? The property in question is approximately 10 years old and very well maintained. We also spent some money tiling the place and doing a facelift of the front yard.
What I want to know is if you've had experience in claiming depreciation and or selling that property. And based on that, would you recommend claiming it? Yes, No? Also if your answer is Yes claim it, would you have any suggestion on what companies to use? Did some initial research and there appear to be depreciation schedules available from around $250 all the way upto $750 (or even more). Not sure what the differences would be, so if you've had an experience of using a certain company for a certain price, please share.

Thank you for your time :-)

UPDATE: Thank you everyone for your suggestions so far. As I mentioned in posts, I'm leaning towards claiming the depreciation tax deductions. Would you please give suggestions regarding what company to use? I read some threads on whirlpool and these two companies seem to come up quite often:
- Washington Brown
- BMT
Thank you again.

Home & Garden

Comments

  • Evil-Elmo on 08/08/2014 - 12:15

    Coming from someone who doesn't own one - I thought half the reason for having an investment property in Australia was to claim tax deductions? :)

    I think the answer will be yes - but I would suggest getting professional advice.

    • Porco Rosso on 08/08/2014 - 13:42

      Thanks! I did speak to my tax agent who says definitely claim it as the higher the tax return amount the higher his fees! But a friend of mine who is a mortgage broker and has lots of investment properties himself suggests otherwise. He suggests not to listen to the tax agent as I don't want to be paying additional capital gains tax which would be a burden while selling.

      • pjcook on 09/08/2014 - 08:04
        +2

        OK, first thing I would be doing is to get a new tax agent….. The higher your return the higher his fees, I hope you never get audited.

      • rick1227 on 09/08/2014 - 23:08

        It depends on your marginal tax rate. If your income tax rate is lower than capital gain tax rate and you are planning to sell this property in near future, you would be better to not claim the depreciation on the property because you taxable capital gain will be lower in the future. However, if your current marginal tax rate is higher than capital gain tax rate, you would benefit from claiming the depreciation since the money you get now from claiming the depreciation is more than the extra amount you will pay for your capital gain tax on the property.

        • Porco Rosso on 10/08/2014 - 10:43

          Thanks rick1227.

          pjcook, I honestly thought that was the norm as I've been with this tax agent forever. Maybe I'll look around then.

  • CyberMurning on 08/08/2014 - 12:38
    +1

    99 from 100 will say yes, you are lucky to have a friend falls under that 1

    • Porco Rosso on 08/08/2014 - 13:44

      So, I take your suggestion as a 'No' then. Is there any other reason for that apart from the fact that whatever I claim will be added to CGT when I sell?
      Thanks

      • CyberMurning on 08/08/2014 - 14:58
        +1

        come on,, ,, i mean YES claim.
        99 from 100 will say yes and you still taking no…. funny

        • Porco Rosso on 08/08/2014 - 15:09
          +2

          Ahh okay. I took the 'lucky' literally :)

  • nrg2010 on 08/08/2014 - 13:08
    +1

    I depreciate mine every year, there is a methodology online……… (see page 15)
    https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/i…

    • Porco Rosso on 08/08/2014 - 13:49

      Hi nrg2010, do you (or rather can you) calculate it on your own based on the formulae in ATO pdf? If I do end up claiming it then I'll get the depreciation schedule done by a company as whatever they charge would be tax deductible as well. I understand that tax deduction is not a 100% refund and I still end up paying a good share of it, but as I'm very new to this I feel worried if I was to calculate something like this myself.
      Thanks

  • Smulder on 08/08/2014 - 13:53
    +5

    It is important to distinguish between depreciating assets vs capital works.

    Capital works are things like the building, floors, doors etc, for which you can claim 2.5% per year and which if you do claim them, reduce the cost base of the asset when you come to sell the property, increasing your CGT.

    Depreciating assets are things like the carpets, air con, hot water system, oven, elevator! etc. These can be claimed at varying rates and do not affect the CGT when it comes time to sell.

    A quantity surveyor will usually give you a schedule for both separately.

    It usually comes down to whether you think there is a large value in the depreciating assets in your property to make that deduction worthwhile vs the cost of getting the report.

    If you don't have a large value in depreciating assets, it is probably not worth getting it done just for the 2.5% deduction for capital works, which will be taken into account when you sell (notwithstanding the 50% CGT discount).

    • Porco Rosso on 08/08/2014 - 14:15

      Thanks Smulder, very informative post. Have spent about $7000 on tiling the place and $1500 on the front yard facelift. I'm assuming these will be depreciating assets and thus for my situation it's more a yes than a no.

      • Smulder on 08/08/2014 - 14:51
        +2

        The tiling will be considered a capital improvement, not a depreciating asset.

        The garden depends on what you have done to it. If you have done concreting, decking or put up a fence etc, they would be capital improvements. If you have put in some plants, decorations, garden gnomes etc then they would be depreciating items… though I am sure most accountants would just put them as gardening expense.

        • Porco Rosso on 08/08/2014 - 15:10

          Thanks again Smulder.

  • donbot on 08/08/2014 - 14:03
    +4

    Claim it now. When you sell it effectively you'll only pay tax on 50% of what you've claimed (as the Capital Gain gets discounted by 50% if you've held > 12months).

    • Crownie on 08/08/2014 - 14:06
      +2

      Could live in the investment property for 12 months as your primary residence to avoid any CGT.

    • Porco Rosso on 08/08/2014 - 14:17
      +1

      Thanks tizey.

      @Crownie, I didn't know about this rule. So before selling an investment property if I live in it for 12 months or more, I don't pay any CGT?

      • Smulder on 08/08/2014 - 14:44
        +2

        Only if you rent it for less than 6 years.

        And note that if you are continuing to claim CGT exemption on the property after you move out, you cannot claim it on a new property you move into, which would then be subject to CGT.

        • CyberMurning on 08/08/2014 - 15:00
          +1

          what if you rent it more than 6 years, say 10 years and then sell.
          the cgt calculation will start from the year 7th, correct?

        • Smulder on 08/08/2014 - 15:24
          +1

          Correct, it is exempt from CGT for as long as you elect it as your main residence, which can be a max of 6 years after you move out.

        • CyberMurning on 08/08/2014 - 15:37
          +1

          @Smulder:

          cool bananas! so you got 50% cgt discount because you hold more than a year and then prorata and pay only for portion of the year 7th to 10th ie 3 years (example sell on the 10th year)

        • Porco Rosso on 08/08/2014 - 16:09

          All starting to make more sense now! Us living in the investment property for a period of time could be a possibility, so it is very useful info.

          Another question comes to mind. If we move to our investment property and rent out our current residence, does CGT apply to it? We've already lived here for 2+ years and would be a while before we move into our investment property. Main question here is, does the order of whether owner occupies the property first and then gives it out on rent or the other way round matter?

          Thanks a lot guys.

        • Smulder on 08/08/2014 - 16:16
          +2

          @Porco Rosso:

          You must live in it before you rent it out. If you rent it out first, the ATO considers that you bought it for the purpose of investment, and therefore CGT applies from day 1. If you eventually move in after renting it out, CGT will apply on sale for the period it was rented out pro-rata over the whole period you owned it.

          As for your other property, you can only elect one property as your main residence at any one time. So if you move into your investment property and elect it as your main residence, your other property no longer becomes your main residence and is subject to CGT if you rent it out from that date, even if it is within the 6 years.

        • Smulder on 08/08/2014 - 16:19
          +1

          @erwinsie:

          I think technically it would be 4 years (6 years exempt, 4 years not = 10 years)… but yes the correct idea.

          You would work out the CGT for the whole period you owned it, then pro-rata that for 3 years, then divide by 2.

        • Porco Rosso on 08/08/2014 - 16:20

          @Smulder:
          Thanks again! Got it now. Such a complex world we live in :)

        • Smulder on 08/08/2014 - 16:22
          +2

          @Porco Rosso:

          Indeed :)

          Also note that if you move out of your old property and don't rent it out (ie leave it vacant) then there is no CGT.

          CGT only applies if you use the property for income producing purposes.

        • CyberMurning on 08/08/2014 - 16:26

          @Smulder:

          oh yes 4 not three but the idea is there. thanks mate

        • Porco Rosso on 08/08/2014 - 16:32

          @Smulder:

          Leaning more towards getting it done now as I'm not really sure I want to sell the property in foreseeable future (or ever). It's more of a positive cash flow property than a capital growth. So I aim not to sell it unless situation changes force me to. Would you recommend any particular company to get the depreciation schedule done?
          Thanks.

        • Smulder on 10/08/2014 - 12:38
          +1

          @Porco Rosso:

          I don't have a recommendation, sorry :)

        • Porco Rosso on 10/08/2014 - 15:31

          @Smulder:

          No worries mate, thanks for all your help with this!

  • tissue on 08/08/2014 - 17:09
    +2

    Ive done it on my investment property, and it meant a difference of $2-5k extra back on tax every year (note that it diminishes over time), but then if/when I sell they adjust the base price of the property by the total of your depreciations. But then you get a 50% CGT deduction on this.

    The benefit that I could see was that its much better for cashflow to claim depreciation than not claiming, and due to the discount you should end up in front regardless.

    • Porco Rosso on 08/08/2014 - 21:10

      Thanks tissue. Would you have any recommendations for what company to use for making the depreciation schedule?

    • ozgriff on 09/08/2014 - 17:08
      +1

      The depreciation schedule is greatly affected by the age of the property.

      The newer the property, the higher the depreciation rate. As you say, it is a diminishing return but I'd be surprised if you didn't get your money back in the first year for the cost of the report, and than can have the next 20 years already set-out for the accountant.

      • Porco Rosso on 10/08/2014 - 10:45

        Thanks ozgriff, the property is 10 years old. Not sure whether that would be considered old or reasonably okay for claiming depreciation?

        • ozgriff on 11/08/2014 - 10:48

          I'd say OK, as tat was roughly the age of ours when we did the schedule.

  • squeeb on 08/08/2014 - 19:19
    +1

    When calculating capital gains or capital losses, the cost is reduced by the amount that you have claimed or can claim as a capital works deduction.

    Adjustments are also done separately to the purchase and sale price for depreciating assets but if you claim them, you get a nice deduction for them in the meantime. Don't underestimate the time value of money!

    Don't try to do it yourself. Seek out a professional to assist you with your tax.

    • Porco Rosso on 08/08/2014 - 21:11

      Thanks squeeb. Asking you the same question I asked in the post above. Would you have any recommendations for what company to use for making the depreciation schedule?

      • squeeb on 09/08/2014 - 19:41
        +1

        At the end of the day a thorough accountant is only going to use the cost of each asset (that is provided by the Quantity Surveyor on the depreciation report) and will then apply the tax office depreciation rates and the method of depreciation that works best for the individual given their circumstances. The Quantity Surveyor will not be able to advise you on what works best for you. Some lazy accountants just use the bulk figures provided in the report.

        It doesn't matter how pretty the report is. Some QS actually go to your property and inspect and take photos (BMT) and others don't but rely on information that you provide and other searches that they undertake. They generally start with the purchase price and apply an asset elemental cost plan which involves the breaking down of the building into its various elements and allocating funds accordingly.

        I am not convinced that paying more for a depreciation report is going to get you a better report or better figures.

        • Porco Rosso on 10/08/2014 - 10:46

          Thanks again squeeb. That was very helpful!

  • nrg2010 on 08/08/2014 - 21:40
    +1

    Don't forget building allowance, this is cut from wiki, but I have read similar from the ATO

    A building allowance of 2.5% (or 4% in certain cases) of the original construction cost of a building is allowed as a deduction against income each year (until the original cost is exhausted). The amounts claimed as a deduction are subtracted from the cost base and reduced cost base of the building. (Note the allowance is calculated on the original construction cost, not a price later paid, and note also a building is a separate CGT asset from the land it stands on, and only the building cost base is affected.)

    Building allowance works as a kind of depreciation, representing progressive decline over the lifetime of a building. But unlike the way depreciation has a final balancing adjustment against income, the building allowance instead gets that as capital gain (or loss) through it lowering the cost base.

    As an example, if it's assuming a building is worth nothing at the end of the 40 years implied by the 2.5% a year allowance, the owner has had deductions progressively over those years instead of only realising the whole lot in one big capital loss at the end.

  • devank on 08/08/2014 - 21:46
    +7

    I would claim now. Few reasons…

    1. 50% CGT excemption.
      Say you are claiming $1000 and your marginal tax rate is 37%. That means you would get back $370. However, thanks to the 50% CGT, you will need to pay only $1000 x 50 % x 37% = $185 when you sell it.

    2. Inflation
      Net present value of that future tax (eg: $185) is lot less than $185.

    3. Timing
      You can always choose to sell the property when you don't have any other income (eg: after retiring). Which would lower your tax rate.

    Q1. Would you say no to a loan where you can decide when to pay and also the total interest payable is -50%?
    Q2. Why sell the property? You don't pay CGT if you don't sell it :)

    Between those two companies, I would chose BMT. I had good experience with www.depreciator.com.au as well.

    • slix_88 on 09/08/2014 - 01:10
      +4

      /thread

      Devank's post above alone covers what you're after in a comprehensive manner

      • Porco Rosso on 10/08/2014 - 10:51

        Yes slix_88 it does :)

    • Porco Rosso on 10/08/2014 - 10:50

      Thanks Devank. That's a very good explanation and I'm convinced that I'll claim depreciation :)
      I'll next be contacting the different companies and see what they have to offer at what price.

  • SlickMick on 09/08/2014 - 12:39
    +1

    I've always used BMT. It's probably money well spent - nothing you can't do yourself, but who wants to look up the value of every item in a house.

    • macfanboy on 09/08/2014 - 17:21
      +2

      And the cost of getting it done is a tax deduction the following year at item D10.

    • Porco Rosso on 10/08/2014 - 10:59

      Thanks SlickMick, that does describe the lazy me very well :)

  • CyberMurning on 09/08/2014 - 17:22

    See everyone say yes claim so I don't get how come your "friend" said don't.

    • Porco Rosso on 10/08/2014 - 10:55
      +1

      Hi erwinsie, the only reason they gave was the burden it added (to CGT) when selling the property. But I'm convinced and will claim :)

  • slewis69au on 09/08/2014 - 18:15
    +1

    I have had good luck with BMT. Your friend who said don't simply doesn't understand net present value. And I am not going to try to explain it here! Put simply would you rather have $100 in your pocket now and have to pay it back in 10 years or would you rather wait and not be asked for the $100. Think of it as an interest free loan from the tax department!

    So many taxation strategies are based on a similar principle - tax deferral. Deferring tax by even one year gives you that money for one year longer to reduce debt, buy groceries, buy internet access and go on ozbargain, etc.

    • Porco Rosso on 10/08/2014 - 10:56

      "Put simply would you rather have $100 in your pocket now and have to pay it back in 10 years or would you rather wait and not be asked for the $100. Think of it as an interest free loan from the tax department!"

      Great way to put it and I love the part about an interest free loan from the tax dept. Thanks slewis69au.

  • superb on 10/08/2014 - 07:44
    +1

    I had used the Silver package from Corp Red. http://www.corpred.com.au/ and was happy with their service. This was easy as I had a new investment property and all items were new so I had listed this myself. If you are buying an older investment property and do not have a list of all the items and the age of these items may be useful for a valuer to come in and do an inspection though it could cost you a bit more.

    • Porco Rosso on 10/08/2014 - 10:59

      Hi superb, yes a friend suggested corpred as well but he went with the cheapest package (bronze?) and had most of the details. In my case, the property is 10 years old and had some modifications over the time. So I'll have to contact different companies and get some more details.
      Cheers.

  • bin555 on 10/08/2014 - 14:26

    Duplicate. Delete please

  • bin555 on 10/08/2014 - 14:27

    I just got one done recently. I know it's between @$250 to $700. Best is to ask your accountant. I went through his recommended one. Cost me around $500-$600. I wouldn't necessarily try to save on few hundred dollar. I was surprised that report was really detail. You don't want to go cheap and to only find that it ends up costing more as they didn't claim enough.
    Also is tax deductible anyways.

    Best ask your accountant. I used BMT as recommended by my accountant.

    • Porco Rosso on 10/08/2014 - 15:32

      Cool, thanks dealonaustralia.

  • bobwokeup on 10/08/2014 - 19:48

    I've got a couple of investment properties and had a Depreciation Schedule completed on both as I am not planning on selling them. Even if I was planning to sell them I would still want the money now and pay it back when you sell.

    I used Tax Shield Australia and liaised with them over email. Both times it was $275 with a good report that I just forwarded to my accountant and he uses every year come tax time.

    • Porco Rosso on 10/08/2014 - 22:34

      Thanks billybob1978. $275 sounds like a bargain price for a good report. I might check them out as well.

    • Porco Rosso on 10/08/2014 - 23:03

      Checked out their website and the sample report as well. They say it is a "self assessed report". So basically we just go through and fill the check list and they provide the report. I'm just wondering if you considered fully assessed report (where they go to your property and have a look). Just curious as to how much difference that kind of a report would make in the actual tax deduction value (apart from the fact that those are about $500 more expensive).

      Personally, I don't mind spending more for the report if the benefits are certain. But then I don't want to spend more money if it's not going to provide me any real benefit (as squeeb mentioned in his post above) just for the sake of a 'brand' name.

      • SlickMick on 11/08/2014 - 09:36

        "self assessed" sounds like you're doing the hard work, and they're just selling a spreadsheet to do a few calcs??

      • bobwokeup on 11/08/2014 - 22:00
        +1

        No I didn't compare sorry. My father-in-law used them for his properties and he never gets ripped off so I went with them :)

        • Porco Rosso on 11/08/2014 - 23:19

          Cool, thanks for the feedback billybob1978!

  • donkey12 on 11/08/2014 - 08:11
    +1

    BMT are registered tax agents, so it stands up against audit.

    Not sure re washington brown tho.

  • spaiydz on 11/08/2014 - 09:49
    +1

    +1 for BMT.

    Not claiming depreciation is like flushing money down the toilet.

    You can expense all sorts of things you didn't think possible like smoke detectors!

    • Porco Rosso on 11/08/2014 - 11:30

      Thanks donkey12 and spaiydz.

  • churchado on 11/08/2014 - 19:03
    +1

    I use Depreciator. They guarantee that if their fee is more than you can claim in the first year then they won't charge you.

    NB: If you are going to use them, let me know your email address so I can get the referral bonus!

    • Porco Rosso on 11/08/2014 - 20:37
      +2

      Done! I'll look them up and if I decide to go with them, I'll PM you. Thanks.

  • Ahan on 11/08/2014 - 23:11
    +1

    I use BMT. They have guarantee to make this worthwhile.

    • Porco Rosso on 11/08/2014 - 23:19

      Thanks Ahan. It appears that BMT is the most popular in the suggestions so far!

  • SaberX on 12/08/2014 - 00:52
    +1

    Misinformed opinions really rile me - but I"m not going to go there(bed time now). Most importantly, i haven't read all comments…. so if i doubel up, and it's late at night, forgive any misgivings or mistakes.

    Firstly depreciation (quantity surveyor) reports costs are deductible (bloody doubel dipping goodness if you ask me). Secondly - to whoever mentioned working out their own depreciation from the ATO, please don't. Just use a quantity surveyor. All clients have usually paid $500 or so for a standard house, got a deduction , and you get a report, nice and simple….

    Secondly - quantity surveyors depreciate and evaluate a crap load of assets that you and I would never imagine depreciating, especially apartments. I did not even know or think they could depreciate some of the share facilities and items I saw in their report, and nor would you if you tried to DIY. The claims for a new apartment ranged from $8k-13k per year in the first few years, it's no laughing matter to save $500 by DIY…. leave it to the experts.

    Thirdly - get rid of that notion of investment properties are for claiming a tax deduction. It has to be one of the most stereotypical and stupidest things I've heard property investors (speculators) say when it comes to negatively gearing. Comon - you're gaining a tax deduction because you're losing net money somewhere. IN the long run your in the game to make more money than you lose in x years. Whether that be through rental, capital growth, or both.

    Fourth - yes you could 'time' your scenario on whether a deduction now is better than a capital gain later down the track, but I'm sure you'll be better off takinga deduction now than paying more tax on rental income. Not to mention future CGT sales will , if you've held the investment > 12 months give you a 50% CGT discount.

    Take the report and don't listen to your friends saying no, otherwise ask for a full rationale and workings why , and use your common judgement to see if it makes financial sense.

    Never used BMT but many clients have, deppro is another common one. Perhaps see from those who have used multiples, which give the best /most aggresive depreciationr ates, although as license surveyors they should be generally in line with the reports they give….

    • Porco Rosso on 12/08/2014 - 09:53

      Thanks Saber!

      • SaberX on 12/08/2014 - 22:49
        +1

        Welcome.. hope it saves you from any bad decisions down the track.

        Definitely don't listen to your mates unless they know what they're doing - clearly successful, not just a one hit wonder stroke of luck, and have lasted the test of time. That's if you aren't confident enough to judge those financially capable/intelligent to begin with.

        Best of luck… and for a few hundred bucks the report won't cost you much at all - tax deductible after all!

      • SaberX on 12/08/2014 - 22:51
        +1

        Oh and another thing I might add… the opposite scenario is what if you end up losing money in a down turn on your capital base of the property? by then won't you be cursing and swearing for having paid tax on rental income you could have offset with a huge 8k+ in decductions from the report?

        Definitely a no brainer in that situation on a risk -reward probability basis.

        • Porco Rosso on 14/08/2014 - 12:35

          Thanks again Saber. Fairly new to the investment property game so appreciate all the good suggestions and tips!

    • 2fiddy on 08/09/2014 - 16:46

      Hi SaberX,

      You seem to be quite knowledgeable in this area. I've got a quick question that's a little off topic. I've recently bought an apartment and has been living in it for the last 9 months(Bought it brand new, moved in upon completion).
      Should i also use a QS or maybe get the depreciation schedule from the developer and claim any kind of tax deduction of it ? My accountant has advised me against it because of CGT, but i'm not planning to sell it anytime soon.

  • ITveteran on 23/05/2017 - 11:42

    Excellent post. Just rang BMT and they asked for $880 for the report. Is it reasonable albeit after 2 years?

    • Porco Rosso on 23/05/2017 - 14:51
      +1

      I ended up going with "Depreciator" for my reports but I don't think they'd be much cheaper. You could always get a quote from them too. I'm happy with their reports.
      And the reports are absolutely worth it. The $880 or whatever it costs will be deductible from your property income. Depending on how old the property is and how the report comes out, it will help you negatively gear the properties (especially if they are positively geared).

      • ITveteran on 23/05/2017 - 16:23

        Thanks for heads up. Although the costs is tax deductible, pro-rata we still have to fork out the bigger part for the costs. Will check Depreciator as well. Cheers

  • GangGang on 23/05/2017 - 22:21

    Someone correct me if I'm wrong. If you only own 1 investment property and have it leased for less then 6 years and have lived in it the property anytime in that 6 years, then you won't be paying capital gains tax and you won't have to worry. Please double check the info I've given.

    • Porco Rosso on 24/05/2017 - 15:02

      From my understanding the rule was something like, you buy a property and then live in it for at least 1 year. You can then rent it out and if you sell it within 6 years from that time, you don't pay CGT. But I'm not sure what happens if you claimed depreciation on that property.
      Again I could be wrong as this is just my understanding :)

      • GangGang on 25/05/2017 - 12:31

        Yeah exactly what i said. I did the report on my previous property and i didn't have to pay the tax. I will be doing the same this time around. I will be double checking with the tax man again.

    • chumlee on 24/05/2017 - 15:06

      So long as you don't have another PPOR

      • GangGang on 25/05/2017 - 12:32

        thanks. forgot to add that in .

  • fan8956 on 15/08/2017 - 11:06

    Can someone clarify this for me? If you lived in the property for 1 year and then moved out to rent out this property, I understand that you could still keep it as your main residence for up to 6 years, so that you are exempted from CGT fully. But as you are using it to produce income:
    - how does the income affect your tax?
    - if the income is negative, would it save your tax?
    - can you claim depreciation?

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