March 2025
Depreciation and property related tax deductions can sound daunting, we know. But getting it right doesn’t have to be hard.
We’ve been preparing Depreciation Schedules for property investors for over 20 years, and we have seen and heard a host of “ideas” about Depreciation. So have the ATO.
Our aim is to simply stop people getting into trouble. The ATO are not as benevolent. Let’s take a look at some common ideas about Depreciation and what you need to know.
An old favourite is when somebody does a reno themselves and assures us, and their accountant, that it was done by the previous owner just before sale of the property.
Another one is when somebody has built a house using a builder and has the contract but withholds the total cost to build the house in the hope that an estimate will be higher.
Then there is claiming improvements as repairs. The line between them is still blurry for many, but the ATO have a pretty clear focus.
And finally expensing Special Levies. This is often a genuine mistake, one that some accountants also make.
Key Points
- 1. Depreciation can only be claimed on work you’ve actually paid for – not what the market value of that work might be.
- 2. Hoping a Quantity Surveyor will estimate the build cost of a newly built property more than what you’ve paid. Where costs are known, the ATO says they must be used.
- 3. Improving a property and trying to claim the work as repairs. Ask yourself – Did the damage you are fixing happen while YOU were renting out the property? If the answer is no – it’s an improvement.
- 4. Claiming a special levy as a repair rather than an improvement. If the damage occurred and was known about before you started renting out the property, you’re in improvement territory.
Trying to claim more than the beer and the pizza you’ve bought your mates
This is the scenario: you buy a property in a poor condition, and then do a renovation for little cost and tell a quantity surveyor the reno was done by the previous owner just before sale.
The quantity surveyor estimates the cost of the reno at trade rates and you depreciate it.
What could go wrong?
We think if you have managed to get a reno done for beer and pizzas and some lost weekends, you’ve done well. But to try and claim a deduction at market rates for those renos is tempting fate. Especially now when there are so many photos online.
When a client calls us up and asks us to estimate the cost of renovations done by a previous owner, the first thing we do is see what photo history there is online. That can help us work out when the renos were done, an important element in later estimating the cost.
You would be dismayed to know that sometimes we can see that the property was sold to our client with no renovations evident and the renos were therefore done by the client and not the previous owner.
Now, if we can spot the ruse in 5 minutes, so can the ATO. And don’t think they are not inclined to look closely at this sort of stuff.
It’s wise (and compliant, of course) to claim only what you spend.
Trying to get an estimate that’s higher than your known build cost.
It’s a little known fact, that if the actual costs of construction are known, they must be used.
And in the case of a brand new house, they are always known.
(And if there is sufficient information in a building contract, we can do a Depreciation Schedule without needing to inspect a property and charge less!)
So why would people get all coy sometimes when we ask for the actual costs?
Because they are thinking it might work in their favour if a quantity surveyor inspects the house and estimates the build cost. If that cost is more than they paid, they’re in front.
Of course, if we estimate the cost and it’s less than they paid, there is some awkwardness when they ‘find’ the building contract that was lost in a flood or eaten by the dog or whatever.
What makes people think we might come up with an estimate higher than what they paid?
Usually it is because they have been told that they have an ‘upgrade package’ or something like that. Perhaps the ceiling is a bit higher, or the bathroom fittings a better quality. Often it’s the kitchen benchtop that has supposedly been upgraded.
The fact is, they paid an amount to the builder to build the house and it doesn’t really matter whether the bathroom fittings are gold plated and the kitchen benchtop made from Carrara marble from the same quarry as that favoured by Michelangelo.
If they were to sell the property, however, those things might help the resale value.
Trying to claim improvements as repairs
Improving a property and trying to claim the work as repairs happens often. And we can understand why.
Improvements get claimed at 2.5% per year, while repairs can be immediately written-off. Who wouldn’t try and expense them and take refuge if asked in the fact that it’s ‘all a bit confusing’.
We write about this occasionally, most recently here.
In determining how work, like painting, glazing, kitchen repairs etc needs to be treated, ask yourself this question:
Did the damage you are fixing happen while YOU were renting out the property?
If it did, you are in immediate 100% write-off territory.
If the damage was there before YOU started to rent out the property, you have improved the property and need to claim that work at 2.5% per year.
Why does the ATO draw this line?
If they didn’t, there would be nothing stopping somebody from buying, say, a fire damaged property and spending $150K repairing it and claiming that whole $150K as an immediate deduction.
So there is a logic, however disappointing it may be.
Don’t let special levies trick you!
Special Levies can be tricky, too.
And disappointing.
Lots of people claim them incorrectly and often it’s an innocent mistake.
We recently had a client who had been hit with a surprise Special Levy of $43,950 not long after buying their ageing apartment specifically to deal with concrete cancer.
While disappointed, the client was confident they could expense that Levy as repairs because it was money spent on, well, repairs.
Nah.
If they had been renting out that apartment for a long time, they might have a chance. But they bought their apartment last year and the fact of the concrete cancer, if not the extent, was known. That damage occurred and was known about long before they started to rent out the apartment.
Even if they had lived in the apartment for 20 years but only just started to rent it out, they would still not be able to expense that Special Levy.
So the only other option is to claim it as 2.5% per year over 40 years.
Expensing a $43,950 repair claim soon after starting to rent out a property is going to attract attention.
We’re always happy to chat about this stuff. We don’t give advice, but we have a fairly good idea of what line the ATO will take on a given issue.
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.
