If you’re on the hunt for your next investment property, don’t discount the ‘diamonds in the rough’ AKA existing properties that may not be a brand new build.
While brand new properties are always an attractive option, providing investors with optimal depreciation claims through higher capital works deductions and plant and equipment assets, older properties can still provide substantial deductions, many of which may be hidden beneath the surface. One reason property investors miss out on legitimate depreciation claims is because they assume that they are not eligible to claim depreciation for items that have been added after initial construction by a previous owner. This is untrue. The confusion often stems from restrictions the Australian Taxation Office places on claims permitted for the structural component of a property based on the property’s commencement date.
While the ATO does restrict owners from claiming depreciation on the building structure for any work that commenced prior to the 15th of September 1987, the ATO allow owners of properties to claim capital works deductions for structures added by a previous owner, so long as the work was completed within the legislated dates.
The following table provides some examples of the deductions investors can claim for previous work completed to an investment property after initial construction.
As the table demonstrates, even if a previous owner of a property originally constructed in 1987 replaces a retaining wall, this will result in $1,500 deductions over the first five years for the new owner.
The type of work completed (capital works improvements to the structure or upgrading plant and equipment) and the date the work was completed by a previous owner will impact on the amount of deductions an investor can claim.
If the property was constructed after 1987 or the renovations were completed after the legislated dates, the new owner will be eligible to claim capital works deductions for the building structure or the new works at a rate of 2.5 per year for the remainder of the full forty year life of the property.
When it comes to depreciating plant and equipment, the property’s construction commencement date has little impact. When a new owner purchases an existing property, the effective life of assets contained will be set from the date of settlement and is dependent on the condition and quality of each individual asset. Depreciation for each of these items will be calculated based on an individual effective life set by the ATO.
When considering buying an older investment property, it is always worthwhile seeking advice from a specialist Quantity Surveyor on what depreciation can be claimed.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation.
For more details on how BMT can help you, visit www.bmtqs.com.au