Sunday, 16 March 2008

Tax Depreciation for Investment Property

Many investment property owners are missing out on the opportunity to reduce their tax bill by thousands of dollars each year by not clearly understanding what can be claimed.

In Australia, investors should be aware of and seek independent tax advice on two main sections of legislation. The first being "Capital Allowance deductions" this refers to the actual construction costs of the building, while the "Associated Tax" refers to the depreciable items such as carpets, blinds, light fittings, hot water units and so on.

Under the Capital Allowance deductions, residential property investors can claim 2.5% of the construction cost each year. Where Associated Tax is concerned, they can claim between 6-12% of the items value.

To better illustrate the value of this tax return, let's use the example of a residential property valued at $400,000 with a construction cost of $200,000. Given that residential investment properties depreciate at 2.5% per annum, you're looking at a deduction of $5,000 each year.

Add to this, the "depreciable" items, which could be in the vicinity of $1,500 - $3,000 and all up, you're looking at an opportunity of reducing your annual tax bill by between $6,500 - $8,000 per year!

To qualify for Capital Allowance Deductions, residential property investors must use the property for the purpose of producing income such as renting, and construction of the building must have commenced after July 1985.

However, should you own an investment property that was built prior to this date, you may still be entitled to claim on "depreciable items".

It is also important to remember that you are also required to have your investment property valued by a professional quantity surveyor who will prepare a Capital Allowance and Associated Tax report for submission to your accountant.

Remember to seek qualified advice from your accountant before taking any actions in regards to this general advice.