Real estate investors can boost tax refunds with depreciation claims

Many landlords fail to take full advantage of one key property tax deduction, and now is the time to wheel it out.

Real estate investors are in line for a larger-than-usual tax refund from July, but there’s one big deduction that many still miss out on.

While a home’s value is higher than five years ago, the value of its bricks and mortar -and its fixtures and fittings – decline over time and this is something that delivers investors a depreciation tax deduction.

For many of the nation’s 2.2 million rental property investors, it totals thousands – sometimes tens of thousands – of dollars a year, at least in the early years of a new property investment.

Rule changes in 2017 took some of the shine off depreciation deductions, when the government banned it on second-hand properties.

Some investors incorrectly believe those rule changes stuffed up all depreciation deductions, but they remain available for new buildings and new items bought in second-hand homes, plus investors can still claim a capital works deduction for the construction costs – usually 2.5 per cent a year.

That capital works deduction alone can potentially deliver $10,000 of tax deductions each year for some properties.

Property investors should claim everything they’re allowed this tax time. Picture: iStock

BMT Tax Depreciation analysed Australian Taxation Office deduction data and found that about three quarters of rental property investors do not claim everything they are allowed when it comes to depreciation.

I was one of those people when I started investing in real estate two decades ago, and thought depreciation was really just claiming curtains and carpets. I probably missed out on many thousands of dollars of deductions before I discovered the benefits of a professional depreciation report several years later.

Depreciation reports typically cost between $300 and $800, and the cheaper versions are often done online and a qualified quantity surveyor probably won’t visit your property. The reports themselves are tax-deductible, and a good depreciation company will let you know in advance if it looks like it will be worthwhile for your asset.

The ATO produces a guide to depreciating assets each year, for those who want to do DIY depreciation. But beware – it’s heavy reading.

The ATO also has tables showing how many years you should take to write off each household asset. This is included in its annual Rental Properties guide for real estate investors, and includes things like ceiling fans (five years), rugs (seven years), carpet (eight years) and home solar systems (20 years).

Getting everything you are legally allowed is vital, especially for this financial year as surging interest rates have pushed up many investors’ mortgage repayment costs by more than 50 per cent.

While these rate rises will push up refunds, people are still out of pocket because deductions only give them back their marginal tax rate – typically 47 per cent, 39 per cent or 34.5 per cent.

The beauty of depreciation is that investors do not pay anything out of their own pocket to get their deduction.

And if you haven’t yet done it, there’s icing on the cake. The ATO allows you to backdate two previous lodgement years of unclaimed depreciation or capital works deductions – a big bonus in an expensive year for property investors.