Real estate investors are advised to take advantage of depreciation as a key selling point, experts say.
Bradley Beer, CEO of BMT, said properties undergoing major renovations qualify for “particularly strong” depreciation.
“This may involve removing or replacing foundations, exterior walls, interior walls, floors, roof or stairs. When combined, these would directly affect most rooms in a property,” Mr Beer said.
Investors purchasing substantially renovated properties can claim depreciation on tangible assets installed during the renovation.
This does not apply to most second-hand investment properties.
“Since both the physical and capital depreciation of majorly renovated properties can be claimed, this makes them even more attractive to the buyer,” said Mr. Beer.
“Reducing tax liabilities will be part of an investor’s strategy and with these schemes, the outcome will be fantastic for the new owners.”
In a guide published last year, Your Investment Property asked Mark Chapman of H&R BLOCK about the claims real estate investors can make during tax time.
“In addition to interest related to the purchase of real estate, you can also claim interest deduction for loans taken out to: carry out renovations; buy depreciating assets, for example furniture; carry out repairs or maintenance; or buy land on which a building must be built,” said Mr Chapman at the time.
When making depreciation claims, Mr Chapman said it is crucial to consult a quantity expert to ensure accuracy and avoid miscalculations.
“Depreciation is generally one of the larger deductions. It’s difficult to work out correctly, and many homeowners miss out on potential deductions by falsely claiming.”
ATO issues a warning
The Australian Taxation Office (ATO) recently warned property investors “don’t bet against housing”.
ATO Assistant Commissioner Tim Loh said investors should declare all of their income, including any capital gains from the sale of an investment property.
“To put it simply, you should expect tax consequences for any property that you derive income from that is not your primary residence,” Loh said.
Mr. Loh also reminded investors to file capital works claims, saying that immediate claims for the full amount for capital works are usually rejected.
“The cost of repairs for wear and tear on the property is immediately deductible if they need to replace or repair existing items, such as curtains, without upgrading them,” he said.
“But improvements or capital expenditures, such as a kitchen renovation, are not directly deductible.
“We also see taxpayers claiming capital works as a lump sum rather than spreading the costs over a number of years.”
In fiscal year 2019 to 2020, 1.8 million Australians owned rental properties and claimed $38 billion in deductions.
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