What is Tax Depreciation and Why Does it Matter?

If you’re the proud owner of a piece of prime real estate, you will probably be well aware of just how a property can appreciate. Whether it’s your primary residence or an investment asset, your portfolio can accrue some serious value over a number of years.

However, there is a mistake that a number of investors make with their rental property – relying on appreciation without taking depreciation into account too.

WHAT IS DEPRECIATION?

Essentially, depreciation is the opposite of appreciation – the reduction in value of an item over time. However, unlike appreciation, you can claim depreciation on an investment property as a business expense. This can include everything from wear and tear on the carpets to damage to appliances. Come tax time, the different in value of these items can score you some serious advantages.

For example, BMT Quantity Surveyors figures that a residential house bought for $300,000 could end up depreciating by $7,500 in the first year, and a further $30,000 over a five year period. That is a significant amount you can then claim back on your tax return. And it isn’t just the objects within the home that are claimable – the actual bricks and mortar of the building can also be claimed against depreciation. These are the two depreciation categories, otherwise known as Plant and Equipment; and Bricks and Mortar.

KEEPING TRACK

However, you still have the problem of keeping track of your depreciating assets. Different methods of working out depreciation, whether assets could be considered identical in function, if one asset is considered part of a larger set; these are all integral to figuring out how much you are actually going to be able to save.

This is why it’s so important to use financial and real estate professionals if you want to make the most of your investment. Property managers, quantity surveyors, accountants, financial planners and all the rest should be your first ports of call when it comes to figuring out depreciation. So long as your property was built after July 1985, you will likely be able to claim some kind of depreciation on your tax return. In fact, you can retroactively claim depreciation for your latest two income returns, so you don’t even need to wait until the end of this financial year to claim some of your tax back.

Tax depreciation is one of those things that so many property investors forget about, potentially losing out on thousands of dollars every year! Make sure you have an updated depreciation schedule, the right professionals on your side and the right know-how on making the most of your tax claims.