Monday, 25 June 2012

Tax time: Depreciation Reports for Investment Properties

This post is part of both my Investing in Real Estate series and my series on tax measures in the run up to the end of the financial year.  All investors in real estate in Australia should get a depreciation report done on their investment property before the end of the financial year end.

Depreciation reports are a schedule of the value of the fixed assets in your property.  This includes all your fixtures and fittings such as lights, cabinets, bathroom tiles etc.  It provides the depreciable value of your property every year which is counted as a an expense for tax purposes.  The beauty in depreciation is that, as a non cash expense, it is effectively 'free money' you get back from the government in the form of
  • A lower tax bill; or
  • A tax return
You do not need to spend money for a depreciation report and you can estimate the value of the depreciable items yourself however if you are audited and the ATO sees that you have done this they are more likely to investigate the values you are claiming.  The best way to get an accurate estimate of the values (and not to miss anything!) is to use a good Quantity Surveyor. 

Quantity Surveyors are not abhorrently expensive (should be in the region of ~$700) and generally pay for themselves in the first year Note that this amount is tax deductible so you're actual out of pocket cost is more like ~$500). 
  • I used which was recommended to me by several other property investors.  I found them to be highly professional the report they produced was perfect (and my accountant was very happy with it. 
  • I have heard bad things from other (cheaper) providers of this service so I would recommend going with these guys. 
  • I have no affiliation with them (other than being a previous client)
  • If you mention that you heard about them from the somersoft website (a property forum for Australian investors) then they should give you some sort of discount (I got a $55 discount when I did this). 
  • If enough people mention this site in addition (i.e. don't lose your discount) I will try and negotiate a standardised discount for my readers. 

How much will I get back from a depreciation report?

The amount you get back will vary depending on the age of your property and any additions that have been made to the property.  Generally speaking
  • Newer properties will have higher depreciable values and so you will get more back
  • Renovations tend to get a lot back
  • There are some build dates where you can depreciate the construction cost of the property (including the bricks etc).  Check out this ATO document to see whether your building falls within this category 
To give you an example my property is a relatively old one (built in the mid 1970s) but has a renovated kitchen / bathroom etc.  In my first year of ownership I claimed a $4,000 deduction and got $1,600 back as a result.

Some older properties will not get this much back because they have had very little done to them since they were built.  If you call depreciator they will be able to tell you whether it is worth getting a report or not.  They are fairly honest about it too as they trade largely on their reputation.

What is the difference between the diminishing value method and the prime cost method?

You will notice on your depreciation report that you have the choice to deduct tax based on a diminishing cost method or prime cost method.  Over the long term these will yield the same amount back on tax but it affects the timing of the deductions.

The diminishing cost method provides a greater deduction up front (close to twice as much) compared with the prime cost method. 
  • High income earners should always take the up front deduction (diminishing cost method) as you will get the greatest benefit from the tax return and you get the money quicker (time value of money)
  • Low income earners who believe their income will increase substantially should use the prime cost method because you only get back value based on your tax rate.  If you foresee your tax rate increasing substantially in the future you may get more back over the life of the investment by deferring some depreciation to later on
Over the life of the investment it makes little or no difference.  I use the diminishing cost method because I do not foresee my income tax bracket changing and I would rather have the cash now than later.

Beware developers who offer depreciation reports with a new property

Developers are more than aware that there is a tax incentive to buying a new property for your investment as you get greater amounts of depreciation.  This value is almost always built into the property when they know they are selling to investors.

I generally do not buy new properties or properties off the plan for this reason.  The developers know every possible advantage from a tax perspective and build this into the price of the property so that they get the benefit.


  1. Thanks very much.

    I see from your link that you provide depreciation reports for investors. Is there anything else that you think investors need to take into account when getting a depreciation report?

  2. First of all, it is necessary to understand the facts that will provide the real estimation in terms of the value of property that is under consideration. Property Valuation and Depreciation report is the act of calculating the worth or actual value of any given property.