Without your help, they might not be. 

And who is there to help you? Depreciator. We’ve been doing this for over 20 years, so we know all the ins and outs of depreciation. Commercial, residential, even farms.

If you have a client  you’d like us to help claim depreciation on a residential or commercial property, please call us on 1300660033, email to affiliates@depreciator.com.au, or use your booking link to enquire online.

Leading up to tax time is the best time to look at ideas to maximise depreciation.

Key Points

• Not living in a brand new property is a big one. But that horse may have bolted by the time your clients talk to you.
• Avoid making improvements if a repair will do the trick is important.
• Timing is important when adding New Assets. If a client is planning to rent out their home and it needs some new Assets to make it more rentable these should be added just before the removalists show up to move the client out. May and June are the ideal time to do this.
• Splitting the ownership of Assets properly will benefit your clients.

Not living in a brand new property can increase depreciation

Renting out a residential property when it is brand new will increase the depreciation. How much? Perhaps by 40% in the early years.

That’s because when a property is rented out immediately after completion, the Assets i.e. appliances, floor coverings, hot water, air con etc can all be depreciated. In a $300K project home, the Assets could be worth $25K, and that will mostly be claimed in the first 6 years or so of rental.

But if your client lives in the property before renting it out, even for just 6 months, they don’t get to claim depreciation on the Assets. We’ve had to let down some clients gently who have assumed that because they were the ones living in the property and using the Assets for six months they would not be deemed second hand.

The difference in depreciation claimed in just the first full year can be around $7,000 vs $12,000 when the Assets are included. Year 2 it would be similar.

We have spoken to some clients who have been doing the sums on whether it’s better to accept a first home owner grant and therefore live in the property for six months vs being able to claim that ‘lost’ depreciation.

If you happen to have a client currently building a house and planning to live in it before renting it out, it might be an idea to alert them to the consequences.

Of course in commercial properties, second hand Assets can be depreciated and we wrote out this extensively here in a previous newsletter. It’s one of the reasons investors are gravitating to commercial property.

Avoid making improvements if a repair will do the trick.

A lot of your clients will fall into the trap of thinking everything they do to a property can be expensed as repairs/maintenance. Sometimes it’s just wishful thinking, but the ATO are on the lookout for incorrect claims.

A lot of ‘repairs’ done by clients are really ‘improvements’ i.e. they are making the property better than it was when they first started to rent it out. It would be better for you to pull them up on this than the ATO.

We suggest people talk to their accountant before doing anything to a property to avoid inadvertently making ‘improvements’.

Using an internal paint job as an example is sometimes the best way to explain the difference to clients. It’s not unusual for a client to get the keys of a property they have just bought and realise that the paint is looking a bit shabby. ’Not to worry’, they say to themselves, ‘We’ll get it painted and claim that $4,000 as a repair’.

Nope. In doing that they have improved the property relative to the condition it was in when they bought it and therefore they claim that $4,000 at 2.5% per year.

We tell clients with that scenario the best thing to do is get some Sugar Soap, hot water and a reluctant teenager and set them to work.

So when your clients bring repair claims to you, drill down and quiz them on the nature of the work and the timing.

This is less of a dilemma for the owners of commercial properties because often the tenants are the ones who pay for repairs and improvements. You can read more about this here.

You can read more on Repairs and Maintenance here.

Timing is also important when adding new Assets to an investment property.

If a property is already being rented out, any brand new Assets added to the property can be depreciated. That’s nice and clear.

But where it gets muddy is when a client rents out their own home and to make it more attractive, they spruce it up and add some new Assets.

To be depreciated, those Assets need to be added immediately before the property is made available to rent. Ideally when the removalist truck is sitting in the driveway being loaded.

What if the Assets were added a month before and not used?

Two months?

Three?

The ATO don’t give a lot of guidance, but when push comes to shove their definition of ‘new’ will not have a lot of latitude.

As you know, any Assets costing less than $300 can be written off immediately. So May and June are the time to add them. 

May and June is the time to add any Assets, of course. Assets costing $300 – $1,000 can go into the Low Value Pool. The depreciation rate for the Pool for first part year is 18.75%. Even if that part year is just a week or so.

And every year after that, it’s 37.5% on the diminishing total. 

Splitting the ownership of assets properly will benefit your clients.

And what if an Asset is owned by two people? A $500 oven owned 50/50 means each person owns a $250 oven and it can be written off immediately.

Similarly, a $1,600 hot water unit owned 50/50 means each owner can put an $800 hot water unit into their Low Value Pool.

Not all accounting software can accommodate this, which is why accountants often ask us to do split Depreciation Schedules i.e. one for each owner. We don’t charge for that sort of thing.

Pooling is of course more generous with commercial property and owners are often able to avail themselves of the Instant Asset Write-Off for any Assets they purchase – even second hand ones.

If you have a client  you’d like us to help claim depreciation on a residential or commercial property, please call us on 1300660033, email to affiliates@depreciator.com.au, or use your booking link to enquire online.