Many property investors and landlords put tax depreciation schedules in the too hard basket.
But they shouldn’t. We recently spoke to Kristian Jeromson from Asset Reports about what tax depreciation schedules are, and how they can save residential property investors money.
Kristian, we refer a lot of clients to you and your company, Asset Reports, but can you explain what a tax depreciation specialist actually does?
Our company, Asset Reports, offers several services for the property industry – preparing tax depreciation schedules is just one of them.
We are essentially a quantity surveying company. We estimate construction costs for a living. We do everything from high rise to houses and work out what the building will cost to build.
As part of this, we can prepare tax depreciation schedules for property investors to give to their accountants. We have a team of Quantity Surveyors who study at university for four years. They also need to register with the tax practitioners board to generate schedules that are ATO compliant. The property investor gets the tax depreciation report from the quantity surveyor and hands it to their accountant, who does the rest.
A lot of people mistakenly think their accountant does these reports but the quantity surveyor works alongside the accountant.
What’s your background and how did you get into this line of work?
I’ve been working in property for over 16 years. My background was property sales, then I moved over into Quantity Surveying and supplying depreciation schedules. We do residential, commercial and strata work.
We do a lot of work in Perth, but I also do a lot of travelling around Australia, educating people, and we now also have offices in Melbourne, Brisbane and Sydney.
Why are depreciation schedules important for property investors?
Depreciation schedules give investors cash back, well, it’s probably more like a tax credit. It increases their return on their investment by increasing their tax deductions each year. It’s a bit like claiming the petrol cost for your car (Interest Rates, Property Management fees etc), but not claiming the car itself (The property).
As the property gets older, you can claim any loss in the value of construction costs as a tax deduction each year.
How much money is at stake?
A significant amount of money! The average is around $8,000 a year for tax deductions. The money doesn’t come back straight away, it works on your taxable income rate. If your tax deduction is $10,000 in one year, and then your tax rate is 37% you get $3,700 back as a tax credit. It may help pay off a tax bill, or add to your tax refund. It’s money you wouldn’t generally have available. You may pop it back into the mortgage for the property, which is what we suggest, or use it for something else.
Construction has an effective life of 40 years, so the $8,000 would become less and less over 40 years. But there are 40 years worth of deductions available for a brand new property. Certain things in properties last for different time frames, for example, fixed cabinetry lasts 40 years, but carpets are 8 years, ovens are 12 years. But if you have a property built more than 40 years ago, and you renovate it, those deductions start again.
What can or can’t be claimed?
It gets very technical, that’s why you need a quantity surveyor. But buying a brand new property generally means you can claim a lot more than an established property. You can claim ovens, air-con, and even your percentage of any common areas in strata, like pools, foyers or gyms could all be claimable for brand new properties. For established properties it is only construction costs – things like the roof, walls, pergolas, fixed cabinetry and tiling.
What preconceptions or misconceptions do people have about tax depreciation schedules?
The biggest misconception is that their accountant looks after the depreciation schedule. But the accountant can’t estimate construction costs for tax purposes. That’s the job of a quantity surveyor.
But probably the second biggest myth is that people also get told their property is too old so there are no deductions to claim. But a 20-year-old property or a renovated property may still have many years of deductions in it. It’s easy to find out if you do have deductions available because we do a free online assessment, and you can then make a decision based on the facts.
You should always ask if deductions are available because just 20% of investors are claiming tax depreciation. This means 80% are missing out on deductions, and we’re not just talking about mum and dad investors here. Often it is high net worth people with multiple properties who haven’t had a schedule in 10 years. Sometimes it’s people who have simply fallen into being a landlord and don’t know about it, because they are renting out a property they used to live in when they’ve moved interstate, for example. It’s definitely worth talking to your property manager or to us about it.
What are the risks of not having a tax depreciation schedule?
Missing out on thousands of dollars each year! A few thousand dollars each year is certainly worth it. It’s about knowing that there are other ways that a property generates a return on investment – not just by the rent or capital growth and market trends.
Our standard price for a tax depreciation schedule for Rentwest Solutions customers is $550 for established residential properties or $295 for a brand new apartment. Our fees are tax deductible and they are one-off fees. You don’t have to get one every year.
If you have any questions about tax depreciation contact our team of experienced property managers today.