Houses versus units: differences in property depreciation
One question we are often asked by property investors is, “Why does a unit obtain more depreciation deductions than a house?” Although it’s not always obvious what differences in depreciation deductions there are between property types, it can be very useful knowledge for any property investor.
When looking at depreciation deductions, there are several factors that affect the final calculation. These include the purchase price of the property, the construction commencement date, the settlement date, the land value (where relevant), and the value of fittings and fixtures located within the property.
Due to the amount of infrastructure involved in the construction of a residential unit compared to a house or residential property, your overall claim can be greatly impacted based on type of property you choose to invest in.
Units also often contain more fixtures and fittings than a house, allowing the owner to claim against many items within the unit (e.g. lights, carpet and dishwashers). In addition to this, unit owners may be eligible to claim a share of common property, which is defined by the Australian Taxation Office (ATO) as ‘areas within a complex or development that are shared between owners’, such as driveways, pools, outdoor furniture, lifts, and fire stairways. Common property represents one of the most significant differences between houses and units for depreciation purposes, though deductions can only be claimed for these in select states.
The example below offers a comparison of depreciation deductions for a unit and house. After the first five years of ownership, the table shows the unit having accumulated $17,500 more in depreciation deductions. This is despite both properties having the same purchase price, construction date and settlement date.
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Note: When purchasing a strata unit there are other costs, such as strata fees, to consider as an ongoing cost of ownership.
Quantity Surveyors are one of the only professions recognised by the ATO as qualified to estimate construction costs for depreciation purposes (TR97/25). As a building gets older, natural wear and tear depreciates the value of the property and its items. The ATO then allows property owners to claim this depreciation as tax deductions. Any property owner who obtains income from their property is entitled to make a depreciation claim.
Despite most investors being aware that they can claim deductions based on the building structure and the plant and equipment items of their unit, many are unaware that they may be able to claim depreciation on common areas as well. To obtain the most accurate and financially rewarding return, it is worthwhile for investors to consult a professional Quantity Surveyor to maximise depreciation claims.
While Accountants and Real Estate Agents are able to estimate depreciation figures on occasion, without a professional Quantity Surveyor’s construction cost knowledge and capability to accurately determine depreciation deductions, it is difficult to obtain accurate depreciation deduction estimates for an investment property. Most importantly, the ATO will not recognise their figures in a tax return. Consulting a Quantity Surveyor guarantees the investor their maximum available deductions.
To provide these deductions, usually a Quantity Surveyor will conduct a site inspection to establish the precise number of plant and equipment items on the property as well as to take measurements, photos, and notes in order to enhance a depreciation schedule. A Quantity Surveyor can also determine the correct share of the common property a property investor is entitled to claim based on factors such as the unit’s size, position within the development, and even its view. They are able to do this even by looking at a development’s building plans.
Following a Quantity Surveyor’s consultation, if an investor is audited by the ATO, their depreciation claim will then be supported by solid documented evidence. Adding to the benefit of a property investment’s complete depreciation schedule, any fees of a Quantity Surveyor are 100% tax deductible, as far as they extend to the production of a depreciation schedule.
Investors can easily estimate the depreciation deductions for any investment property by using the free BMT Tax Depreciation Calculator. This can be downloaded as an app to your smart phone for free by clicking here.