With the real estate market enjoying historic highs, investing in property could be one of the surest bets you can place to secure your financial future.
Whether that means releasing the equity stored up in your home or speeding up the process by rentvesting, it might be something worth considering. But taking that first step up the property investment ladder can be a bit scary, particularly with all the confusing jargon you have to wade through first.
Information overload means that sometimes new investors get a little lost. As a result, they could miss out on some of the brilliant benefits they might be entitled to. Understanding negative and positive gearing is one thing. Depreciation is another crucial factor that's often overlooked.
So, what is depreciation?
There's a reason why this question gets asked a lot. That's because it's a bit of a tricky topic to get your head around, even for some experienced property investors. But we'll make sure you pick up an appreciation for depreciation.
Put simply, if you own an investment property, chances are you can claim wear and tear costs on the asset come tax time, just like you can with your car, or if you use a home computer for work. "Claiming tax benefits on your investment property is all part of the long-term play to set yourself up to be financially secure," says John Sheehan, General Manager of Invest by Metricon.
What can I claim?
Your accountant will be able to guide you, but generally, the Australian Tax Office (ATO) recognises two types of possible depreciation deductions:
- Capital works deductions
- Plant and equipment deductions
Capital works deductions are all about claiming back wear and tear on the structure of the building itself, including stuff like doors, cupboards, walls and windows.
Opting to buy a home and land package and build a new investment property can be a smart idea. The ATO allows you to claim depreciation on the cost of construction.
The ATO sets this deduction at 2.5% for the first 40 years. That's when they determine a home will need to be replaced.
Plant and equipment deductions apply to all the internal easily replaceable fixtures and fittings of a property investment. Things that aren't considered part of the long-lasting structure of the building, like carpet, blinds, air-conditioning units, the stove, and the hot water system.
Again, building a new investment property to rent out is a smart option. As of 2017, investors buying a second-hand property can't claim plant and equipment deductions.
The ATO sets out the expected life of each of these plant and equipment assets. There are two methods you can opt for when claiming depreciation against them:
- Prime cost method
- Diminishing value method
The prime cost method, also known as the 'straight-line method', locks in the amount you can claim for the useful life of an asset. So, if the carpet is estimated to have a ten-year life, and your claim is $100, then that's what you'll be able to write off each year for a decade.
Or you can opt for the diminishing value method. It allows you to claim most of the cost of the carpet in the first few years, then much smaller amounts as it nears the end of its useful life.
"Your accountant will be able to give you good advice on which method might work best for you," John recommends.
Make sure you seek financial advice
It can be confusing figuring out what you can and can't claim, how much you're entitled to, and what methods to use when filing a tax return.
While we've tried to be as helpful as possible, this article should not be considered professional financial advice. It contains general information only, and you should seek out independent, professional advice on your personal situation before making any financial decisions.
Having an accountant on your team is invaluable as a property investor. It might also make sense to engage a quantity surveyor too – a qualified professional who specialises in building and construction costs.
"Sometimes you have to spend money to make (or claim back) money," John says. "We often recommend seeking out a registered quantity surveyor. You'll have to fork out for their fee, but it's well worth it in the long run because they'll figure out exactly what you're entitled to claim on capital works and plant and equipment deductions at tax time."
Even better, most quantity surveyors will send their reports directly to your accountant to prepare your claim with the ATO. So you'll hopefully see the results in your tax return with minimum fuss and maximum peace of mind.
While we've tried to be as helpful as possible, this article should not be considered professional financial advice. It contains general information only, and you should seek out independent, professional advice on your personal situation before making any financial decisions.
If you feel ready to start your property investment journey, learn more about Invest by Metricon today. Invest by Metricon offers an end-to-end process that allows you to obtain a rent-ready, premium home in one of Australia’s leading estates, simplifying your investment journey. With new build investment opportunities across Victoria and Queensland, you're sure to find something that suits your investment strategy, no matter where you live.
