If you’re a property investor, careful planning and a depreciation schedule are essential

14 Jul

If you plan to use property as a way of building personal wealth, you need to do a number of things right.

  • Minimise exposure to your own existing assets – do not over-reach yourself financially.
  • Make sure that you have insurance cover in place in case your employment situation changes – or if your partner is suddenly not able to look after the children and you have to.  Cover all those bases – talk to a general insurance broker.
  • Leverage your investments by using someone else’s money (usually the bank’s)
  • Build up a solid relationship with a mortgage broker you can trust.  Let the broker negotiate with the bank – never go to the banks direct.
  • Carry out careful due diligence before making any property purchase and ask lots of questions.
  • Build up a trusting relationship with your real estate agent and ask them to check the selling history of other competing properties in the area. If in doubt, bale out of a purchase you are not sure about and keep looking – there are plenty of properties out there and you need to buy at the right price.
  • Make sure that you are purchasing the investment property in an appropriate structure.  Talk to your accountant first … changing ownership later on is very expensive in stamp duty and other fees.
  • If you buy strata titled property, remember to factor in the additional strata fees and management costs into your calculations.
  • When you have made a choice, ensure that you brief an ATO approved and licenced company to carry out an inspection of the property and then provide you with a depreciation schedule to hand over to your accountant ready for tax time.
  • Choose a real estate agency that has an efficient and well managed property management department.  Renting the property out yourself is fraught with all sorts of potential nightmares and complex liabilities.

MAKING THE MOST OF YOUR PROPERTY INVESTMENT

Over the longer term, an investment in property is an excellent way to build up wealth and assets.  Having rental properties in your portfolio enables you to establish a stream of residual income and legally reduce tax by means of negative gearing. However, do not just rely on the tax benefits which are available at the present time – regard them as a bonus and not the sole reason for property investment.

The rental income from your property is only one of the benefits you can expect and it’s amazing to discover that a high percentage of Australian property investors are not taking full advantage of depreciation.    Unless you have a depreciation schedule provided for you by an ATO approved and fully licenced firm, you will be walking away from a massive part of your potential income stream.  It’s as bad as forgetting to charge rent!

There are two classes of assets that can be depreciated

Plant Asset Allowance.  Plant assets include:

  • White goods … refrigerator, washing machine, tumble dryer if these are provided;
  • The hot water system, solar photovoltaic and /or solar water heating installations;
  • Floor coverings – carpets, vinyl or similar flooring, engineered timber or solid timber flooring;
  • Blinds, shutters and other window covering options;
  • Security systems and smoke detectors;
  • Installations that are powered by electric motors – exhaust and ceiling fans;
  • Air conditioning systems;
  • Automatic gates, powered garage doors;
  • Furniture – providing it is part of a ‘package’ that is provided with the regular rental payments.

Most plant asset items can be fully claimed within five to ten years of you purchasing the property and that is when you will achieve the greatest benefit.

What can you not depreciate?

Landscaping costs, grass, plants and investment in trees and hedges.

The second category is the Building Allowance and you definitely need a licenced depreciation schedule specialist to help you because the gross floor area of the building needs to be measured accurately.

If you are investing in unit apartment or villa, or a strata titled property with common areas, the same depreciation principles apply to those of a house on an individual block.  You will be allowed to claim deductions for your share of the common assets in the building that might include items such as hydraulic car lifts, fire and safety equipment, security systems, furniture in a ground floor common reception area, pool equipment and items of gym equipment.

The building allowance for the structure of the building is claimed at 2.5% of the actual building construction cost.  It is applied to buildings built after 1985, starting from the building’s completion date and is claimed over a 40 year period.

There is a common misunderstanding that older properties cannot provide significant depreciation and tax deductions. It is important to note that regardless of the age of the age of the plant asset items they are valued and start a new ‘tax life’ at each property settlement.

However, if you, for example, buy a 25 year old house, the remaining building allowance depreciation will be 40 – 25 = 15 years.

Land does not count for depreciation, so your depreciation schedule specialist needs to establish the value of the land and subtract that from the purchase price of the building.

For example, you purchase a house for $450,000 with the intention of renting it out.  The value of the land is established to be $150,000 and therefore the building allowance calculation will be based on 2.5% of $300,000 per annum.

Tips

If you plan to renovate or improve a rental property, consult with a depreciation specialist before work starts. In this way you can secure the maximum benefit from plant asset depreciation.

The first five years of owning a property is the best time to maximise depreciation.  Work with your accountant and apply the tax savings to paying off your loan or purchasing another investment property.

You will then be well on the way to building a valuable portfolio and creating a viable wealth creation programme.

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