Investment property tips - depreciation

Wanting to capitalise on the rental property that you own? A lot of people hold rental properties for a two-fold reason: to negative-gear (reduce their current taxable income) and to obtain capital growth from the property in future years.

To maximise negative gearing it is advisable to obtain a quantity surveyor's report to utilise the maximum depreciation possible. The surveyor will look at all fixtures and fittings on the property and assign a value to each from which depreciation can be calculated.

If the building was constructed after 17 July 1985 (for residential properties) the quantity surveyor can estimate the cost of building the premises and a capital works deduction of 2.5% can be claimed on that.

This may not seem like much but you may be surprised at how much it can increase your deductions. If you consider a building that cost $110,000 to build at a rate of 2.5%, that will be $2,750 in deductions claimable. Now add to that items such as carpets, curtains, blinds, hot water systems, ovens, stoves, dishwashers, light fittings, security systems, air conditioners/heaters etc, the claimable depreciation amount could rise to around $6,000.

When you consider that kind of deduction with an income of $80,000 it will give you a tax saving of $2490... each year! Even on a lower income between $30,000 to $75,000 you would still receive a tax benefit of $1,890 per year.

A quality surveyor will provide a report on the property giving a breakdown of the fixtures and fittings as well as the capital works amount in depreciation schedules tailoring to prime cost, diminishing value and low-value pools. Armed with this, you can give it to your tax agent when you do your next tax return.

You can find quality surveyors in the phone book and their prices usually range from $600 to $800 which can be written off over a period of five years. All-in-all it's not a bad investment.

Beware: Common errors in rental property claims

The ATO has stated it will continue to closely scrutinise rental property expense claims for the 2007 income year.

Some of the areas of concern identified by the ATO in recent compliance activities include:

- Claiming deductions during a period where the property is not genuinely available for rent;

- Claiming full deductions when the property was available for rent only part of the year.

- Claiming initial repair and or renovation costs as repair and maintenance costs (these should be attributed to the base cost of the property under the CGT rules);

- Incorrectly allocating deductions related to private borrowings or travel; and

- Incorrectly claiming deductions for legal expenses for things such as costs associated with buying and selling a property or defending title.

I'll be detailing some of these issues in more detail in future posts.

SOURCE: National Tax and Accountants' Association Tax Schools Seminar 2007