Do I need a tax depreciation report for my investment property?
If you own a rental property, otherwise known as an investment property, you should obtain a tax depreciation report in order to maximise your tax deduction for depreciation. If you don’t have a depreciation report you may miss out on the opportunity to legally reduce your rental profit, or increase your rental loss. The cost of the depreciation report is also tax deductible.
The tax depreciation report will show the following:
- Address of your property
- Property type – residential, commercial, property development
- The date of construction
- Construction costs
- Asset values
- Settlement date
You will need a professional valuer to prepare the tax deprecation report. This way you can determine an estimate for the value of different assets in your investment property. Quantity surveyors who specialise in tax depreciation reports are easy to find on the internet. Some project management firms, builders, and supervising architects also prepare these reports.
The tax depreciation report shows the depreciation to which you are entitled on a year-by-year basis for each deductible item in your investment property. You are also entitled to a tax deduction for depreciation on items in any common areas.
Each item listed in the report has a corresponding allowable depreciation claim. The depreciation rates in the report are extracted from suggested rates released by the Australian Taxation Office. You can only make an actual claim for depreciation in your tax return for the periods that your investment property is rented or genuinely available for rent (that is, listed with a real estate agent for genuine rental).
Items in an investment property that are listed in a tax depreciation report include freestanding bathroom accessories, blinds, carpets, floating timber floors, clothes dryers, washing machines, cook tops, freestanding wardrobes, freestanding furniture, heaters, light shades, microwave ovens, range hoods, and refrigerators. Freestanding items are those items that are portable or moveable.
Items in common areas that are listed a tax depreciation report include automatic garage doors, carpets, door mechanisms, fire alarm bells, fire extinguishers, fire hoses and nozzles, intercom system assets, lifts, and ventilation fans.
It’s often difficult to determine the actual construction expenditure incurred when you build or purchase an investment property. The construction cost is the actual cost of constructing a building or extension. You must either keep your own records to determine the actual construction costs, or obtain a professionally prepared report. Only an appropriately qualified person, who has experience in estimating construction costs, can prepare the tax depreciation report. For instance, a project management firm, builder, supervising architect or quantity supervisor.
The tax deduction for construction expenditure depends on the type of construction and the date of the construction expenditure. The deduction for construction expenditure is spread over 25 or 40 years so your report will contain the tax deduction for construction costs on a year-by-year basis.
The report will account for architects fees, engineering fees and foundation costs.
Once the construction is complete you can claim the construction costs of your investment property, including extensions, alterations, structural improvements and changes, retaining walls, concrete driveways, in-ground pools, protective fencing or timber decking around the pool, environment protection earthworks, lift wells, atriums, hand rails, hot water system piping and skylights.