When you’ve been doing Depreciation Schedules as long as we have (nearly 25 years) you come across every myth out there.
Some of them often.
They come in cycles, and it’s usually because a journo has written a story and got something a bit wrong. We used to chase up those stories and get in touch with the person who wrote them to explain their errors, but they were rarely interested.
Lately, more clients are doing their own ‘research’ using ChatGPT – it’s only as good as the information it is drawing on.
We have been asked a few times recently by clients whether we can ‘speed up’ their depreciation. So there is something about that doing the rounds.
The myth about depreciation only applying to new properties persists. This one can be traced back to the rule change in 2017 – and to people with an interest in selling new properties.
Claiming for your own labour has popped up a bit.
As has the idea that it’s possible to claim years of unclaimed depreciation in the current financial year – we put that one down to wishful thinking.
Do you have a question about property depreciation? Make an enquiry here or call us on 1300660033 and our team will be happy to talk you through it.
Key Points
We dispel four common myths about depreciation:
- 1. Myth: Depreciation can be sped up. Not true! Residential buildings depreciate at 2.5% per year – there is no speeding it up.
2. Myth: There is no depreciation left in older properties. Not true! Any property where construction started after September 1987 has depreciation on the building waiting to be claimed.
3. Myth: I can claim for my own labour. Not true! You can only claim money you have actually spent.
4. Myth: I can claim all my ‘lost depreciation in one year. Not true! Depreciation needs to be claimed annually against the income earned for each year.
Myth 1: I can speed up my depreciation
Twice in the last week, we have had clients get in touch with us and instruct us, with some confidence, that as they only intend keeping their property for five years, they want to claim all the available depreciation in the next five years.
They were dismayed when we said it doesn’t work like that. Both said, ‘But what about that accelerated depreciation?’ That was when we knew someone had perhaps written an article that was not clear – or had errors.
Residential buildings, where the construction started after September 1987, depreciate at 2.5% per year. There is no changing that. If you buy a property that is, say, ten years old and you rent it out for ten years, you claim depreciation on the building at 2.5% per year on the original construction cost of that building for those ten years.
What about a brand new house? The building itself will depreciate at 2.5% per year for 40 years. You can’t speed that up. Read more from the ATO on this here.
The Depreciating Assets, however, can be depreciated much more quickly. They are things like appliances, air con, fans, floor coverings, curtains, anything that won’t last as long as the building.
Assets valued at under $300 can be written-off immediately. Those valued $300-$1,000 can go into the Low Value Pool. We have written about the Pool previously here. The Pool is depreciated very quickly in the early years.
Assets valued at over $1,000 get depreciated according to their Effective Life. If people opt for the Diminishing Value method (and everyone does) the depreciation is higher in the earlier years. You can read more on Depreciating Assets from the ATO here.
So in that way, the depreciation on the Assets can be accelerated.
Myth 2: There is no depreciation in older properties
We know who likes to propagate this myth – people selling brand new properties. And to be fair, there is more depreciation available in a property that has never been lived in.
But older properties often still have plenty of depreciation in them. We have written about this before, mostly recently here.
A decent sized 2005 built project home, for example, might have cost $120K to build 20 years ago. There is still 20 years of building depreciation to claim on that property at $3,000 per year. That’s a handy tax deduction to pick up off the table year after year.
In many cases, we can tell you over the phone in an initial phone call how much depreciation might be in your ‘old’ property.
Any house where construction started after September 1987 has depreciation on the building waiting to be claimed. And with older properties, there is depreciation often sitting in renovations done by previous owners. Yep, you can claim depreciation on a renovation you didn’t even do. We have written about this here before.
And there is a good chance we can put together a Depreciation Schedule on an older house without you having to pay us to inspect it. We wrote about this recently here.
If you have an older property and have been thinking there is no depreciation it, wouldn’t you like to know for sure? Send us the address here and we’ll have a look at it and let you know.
Myth 3: I can claim for my own labour
It’s tempting, we know. Claiming a tax deduction for your own sweat (and occasional tears) when working on a rental property.
A few times every week we have to break it to people that they can’t claim a tax deduction for their own labour. And then console them.
The scenarios don’t vary a lot. Somebody buys a second hand property at a discount because it’s a bit tired and spends a couple of months sprucing it up.
It takes a couple of months because they’re doing it themselves. After work, on weekends – forsaking golf. Perhaps they even took some time off work as ‘holidays’.
They keep a record of the costs of all the materials they use. One client even kept a timesheet of the hours he spent doing the work and decided that fair compensation would be a modest $60 per hour. The ATO don’t see that as fair. They are quite happy for you to claim compensation for money that you actually spent, but they are not going to compensate you for your time.
The second disappointment comes when we tell them that work they thought their accountant could be claim as repairs/maintenance would instead need to be depreciated – at 2.5% over 40 years.
Painting is the best way to explain this as it is something many investors do when they get the keys to their rental property. That can be a sobering day when you walk into an empty property. The crowds who were there on inspection days are gone. The real estate agent, your temporary best friend, who was distracting you is not there. Neither is the furniture. That’s when you realise you’ll need to roll up your sleeves and get the tools out.
The whole property needs a paint, but you figure that is a repair/maintenance issue, so anything you spend will be immediately deductible. Not so, sadly. It is not a repair because the paint did not deteriorate while YOU were renting out the property. You have instead ‘improved’ the property, and so you need to claim that paint job at 2.5% over 40 years.
We have written here most recently about repairs vs improvements.
Myth 4: I can claim ‘lost’ depreciation in one year
This is a curious one, but it comes up fairly often. It’s usually a client who has been doing their own tax (or been going to a tardy accountant).
All other tax deductions have been claimed: council rate, interest, property management fees, insurance etc. But no depreciation has been claimed.
Perhaps they didn’t know about it. Or didn’t think there was any depreciation in their property.
‘No worries,’ they say. ‘I’ll just claim it all now.’
Yeah, nah.
Depreciation is treated the same as all other tax deductions. It needs to be claimed annually against the income for each year. If depreciation has not been claimed for a few years, it can’t be claimed in the current financial year.
You might be able to get some of that ‘lost’ depreciation back, though. The ATO allows two completed tax returns to be amended, but that’s a bit of mucking around. They used to allow four completed returns to be amended, but scaled that back – nobody would ever seek to amend a tax return unless they thought the ATO owed them money.
The lesson is to make sure you cover off depreciation – at least ask the question. Get in touch here and we’ll tell you quickly whether there is depreciation to claim in your property.
Do you have a residential or commercial property you would like us to help you claim depreciation for? Or a question about depreciation?
Order online now or call us on 1300 660 033 and rely on our 20-plus years of experience in estimating depreciation returns.
