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Depreciation can be a rather complex area of tax, with specific rules, qualifying dates, depreciation rates, methods for claiming and pre-determined effective lives of assets.
Claiming depreciation deductions can be a confusing task for many property investors.
It’s imperative investors get a depreciation specialist to prepare their tax depreciation schedule. This will ensure maximum depreciation deductions and that all claims are legally compliant.
To help property investors ensure their deductions are claimed correctly, here are four common mistakes to avoid when claiming depreciation for an investment property:
1. Not making a partial year claim
Rental property owners should only claim deductions for the periods their property is rented out or is genuinely available for rent. Holiday home owners in particular should be aware of this to ensure deductions are claimed correctly.
Similarly, if an investor has only owned their property for a few months of that financial year, they can still make a partial year claim for these weeks or months it was income producing.
To ensure deductions are correctly claimed for the portion of the year a property is income producing or available for rent, investors should request a tax depreciation schedule. A depreciation schedule will outline all qualifying deductions from the date of settlement and include a partial year claim based on the time the property is rented.
2. Claiming capital works and plant and equipment deductions incorrectly
Investors who lodge self-assessed deductions often make the mistake of incorrectly allocating plant and equipment assets as capital works deductions and vice versa.
This can result in two issues for the investor. Firstly, they could overclaim, resulting in unwanted attention from the Australian Taxation Office (ATO), or secondly, they could under claim and miss out on receiving the maximum deductions available.
These mistakes generally occur because investors do not have the knowledge of depreciation legislation necessary to separate items appropriately. Furthermore, it’s often because they have not sought adequate advice or requested a tax depreciation schedule.
To ensure all deductions are correct and maximised, a specialist quantity surveyor will complete a site inspection as part of the process of arranging a depreciation schedule. This inspection allows a depreciation expert to take photographs and note every asset within the property. They will also perform the necessary searches to find any details required to estimate construction costs, including those for any renovations that have taken place, even if completed by a previous owner.
A depreciation schedule will outline all deductions available for capital works and separately itemise all deductions for plant and equipment items.
3. Not splitting deductions correctly as co-owners
Many co-owners make the mistake of calculating depreciation first and then splitting the deductions based on ownership percentage. However, depreciation legislation allows co-owners to split an asset’s value by ownership percentage first, potentially qualifying them for higher rates of depreciation, meaning more money back in both owners’ pockets sooner.
Co-owner investors should request a split depreciation schedule to ensure deductions are outlined based on each owner’s interest in the assets contained within the investment property.
4. Incorrectly claiming repairs, maintenance and capital improvements
Expenses for repairs and maintenance are claimed differently to capital improvements. The ATO provides clear definitions of each to help investment property owners to ensure these claims are made correctly.
Repairs (work completed to fix damage or deterioration to a property) and maintenance (work completed to prevent deterioration to a property) should be claimed as an immediate deduction in the year an expense occurred. However, any capital improvements (work which improves the condition or value beyond its original state at the time of purchase) must be claimed as a capital works deduction or as plant and equipment depreciation.
If you’re preparing your tax return, it’s important to seek advice from an expert. Quantity surveyors are recognised by the ATO as one of a few professionals with the necessary knowledge to calculate construction costs for depreciation purposes.
Alongside your accountant, they can provide guidance to steer you on the right path to ensure your claim is correct and you receive the best possible deductions. This also means you’ll have the adequate evidence necessary should the ATO question any of your claims.
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