Tax depreciation: what investors need to know
When selling property, something that can differentiate a good agent from a great agent is their general understanding of the financial aspects that add value to an investment, writes Bradley Beer of BMT Tax Depreciation.
One of these aspects is depreciation which can make a significant difference to the cash flow position an investor attains from the property they purchase.
It can therefore be a useful tool that agents can use to assist with their sales as it can help buyers calculate whether a property is affordable or not – or whether it has hidden value when tax depreciation benefits are realised.
Despite the extra cash flow depreciation can provide investors, it is all too often overlooked or underclaimed by those who are entitled to it.
Depreciation is a tax break for investors who own income-producing properties. The Australian Tax Office (ATO) allows investors to claim deductions for the wear and tear that occurs to a building’s structure and the assets it contains over time.
By enhancing an investor’s awareness of depreciation and the wealth of tax savings that could be hidden within a property, agents can further solidify a relationship of trust with a client.
An investor is naturally focused on achieving a strong investment return, so as an agent, encouraging clients to explore tax depreciation and its benefits may help them achieve a positive investment outcome.
The 2017 federal budget proposed legislation changes to deductions for plant and equipment assets in residential investment properties. This will be an important factor to advise clients of so they can be aware of any impacts to their scenario in the near future.
While the rules are yet to be legislated by Parliament, it is proposed that owners of secondhand properties will only be able to claim deductions for plant and equipment assets they spend money on themselves or for which they directly incur the expense.
This means those investors who exchanged contracts for secondhand properties purchased after 7:30pm on 9 May 2017 will no longer be able to claim depreciation for existing plant and equipment assets.
However, affected investors will still be able to claim capital works deductions for the building structure if the property commenced construction after 15 September 1987.
When it comes to plant and equipment deductions, it is estimated that around 12 per cent of a typical residential house is made up of these items. Therefore, deductions for the capital works component of a secondhand property will still entitle owners to a significant claim.
Current investment property owners will be happy to hear that properties purchased before 9 May 2017 will be grandfathered, and depreciation deductions can continue to be claimed as per normal.
There is certainly no expectation that agents become depreciation experts. However, a general understanding of depreciation and the new proposed laws could add value to client relationships.
Some basic education can end up creating a ‘win-win’ for client and agent, where the client maximises the cash flow from their investment property and the agent solidifies their relationship with the client.
Who knows... the valuable tax savings investors could achieve from depreciation may help a prospective investor to decide to go ahead and buy or even encourage them to make additional property purchases down the track.