FOR REAL ESTATE AGENTS who have older property listings on their books, a reminder about tax deductions can help secure investor buyers for older properties. Bradley Beer explains.
While it’s sometimes true that older properties will later result in additional expenses due to the need to complete more regular repairs, many expenses involved in holding an old or new income-producing property are tax deductible.
Reminding potential investors about the expenses they can claim at tax time can help to win over buyers who are deciding whether a property is right for them.
Of all the expenses investors can claim, the one most often missed is property depreciation. As buildings get older and experience wear and tear they depreciate.
The ATO allows investors to claim this depreciation as a tax deduction.
Depreciation deduction falls under two categories:
- Capital works deductions for wear and tear of the structure and fixed items
- Plant and equipment depreciation for the mechanical and easily removable items contained within the property, such as carpets and air conditioners
Those who purchase older properties are more likely to miss out on claiming the maximum depreciation deductions available. The main reason this occurs is because often these investors assume that their property is too old to receive deductions.
This could stem from misunderstanding current tax legislation, which states that capital works deductions are restricted to those properties in which construction commenced after 15 September 1987. However, this rule does not mean that owners of older properties are unable to claim depreciation.
On the contrary, these owners are still entitled to substantial deductions for the plant and equipment assets contained within the property.
If any renovations have been completed more recently they could also be entitled to capital works deductions.
This is the case even if the renovations were done by the previous owner, as long as they were completed within the ATO’s legislated dates.
Research conducted by BMT Tax Depreciation suggests that during the 2014–15 financial year, 21.5 per cent of depreciation schedules were for properties built prior to 1987.
BMT also found that, on average, owners of these properties could claim $4,445 in depreciation in the first financial year alone and $31,166 over the first 10 years. It’s important that the investor looks at both the before-tax and after-tax scenarios to get a true picture of what the costs of owning the property would be.
The example (left) shows the difference that claiming depreciation would make for an investor who is considering purchasing an older three- bedroom house for $500,000.
The real estate professional helped the investor by providing a rental appraisal. They were also able to help estimate the expenses involved in holding the property, which totalled $36,738. The agent contacted BMT Tax Depreciation, who estimated the investor could claim $6,000 in depreciation in the first financial year.
The scenario shows that depreciation would improve the investor’s tax return by $2,220 in the first year alone.
A specialist Quantity Surveyor can provide estimates for any listing, which can easily be included in a sales information pack.