December 10, 2022

 

What is depreciation on an investment property?

Depreciation on investment property is a form of tax savings for the wear and tear of any income-generating property. Depreciation of investment property is a form of beneficial tax deduction against the depreciation of any income-generating property so that investment property owners can put back the money they saved on their taxes back into the upkeep of their investment property. 

Tax claims on depreciation on an investment property can be claimed only after the investment property has been carefully inspected by a tax-certified quantity surveyor. The quantity surveyor will carefully inspect and evaluate a newly acquired property in its actual condition immediately after its purchase or the current condition of an existing income-generating investment property.

To properly file depreciation on investment property is to have acquired their investment property inspected by a quantity surveyor able and have a depreciation schedule prepared. Claiming depreciation on investment property is one of the advantages of owning an income-generating investment property.

The responsibilities of a quantity surveyor.

The registered quantity surveyor is responsible for inspecting and estimating the depreciation on an investment property for all classes of investment property. While some quantity surveyors specialize in certain types of investment property they generally follow the same basic template in inspecting, estimating, and documenting depreciation on an investment property.  Here are some tasks that a quantity surveyor may perform on estimating the depreciation on an investment property.

  • Quantity surveyors inspect the documentation of expenditures of investment property owners in the maintenance and upkeep of their investment property.
  • Quantity surveyors may inspect previous depreciation schedules filed by investment property owners to accurately estimate the depreciation trend of an investment property.
  • They determine the estimated maintenance yearly costs incurred by investment property owners in maintaining their investment property.
  • They assess the current value of an investment property against the upkeep costs of an investment property owner.
  • They prepare and certify accurate depreciation schedules for proper filing by the investment property owner.

How depreciation on investment property works.

With some very specific depreciation on investment property claims that require the expertise of a specialist tax-certified quantity surveyor, only a fully qualified quantity surveyor can provide a highly accurate estimate on tax depreciation figures and tax depreciation schedules that investment property owners can apply for the depreciation on their investment property. 

With the professional help of a certified quantity surveyor, investment property owners can maximize the depreciation on investment property tax benefits when they file their investment property.

How depreciation is claimed on an investment property.

Since various types of tax benefits make properties profitable to invest in, by determining the right depreciation rate to be claimed on investment property, investment property owners can claim substantial tax allowances and breaks on their investment property where the tax savings they are entitled to can be put back into maintaining or even improving their investment property.  

Depreciation on investment property is an essential and very advantageous tax allowance to claim for investment property owners. So how does a property investor claim depreciation on an investment property?

Property investors can claim depreciation on investment property through:

  • Capital works deductions.
  • Depreciating assets.

Capital works deductions.

Capital works deductions are the total cost expended by an investor in the cost of building their investment property with the depreciation rates on their newly built investment property spread out, generally, over forty (40) years. Forty (40) years is the generally accepted practice of estimating the length of time an investment property can generate an income before it needs to be replaced. 

Depreciating assets.

Depreciating assets can best be described as an investment property or any property that is used to maintain an existing property that is expected to have a limited effective useful life such as light fittings and carpets, computers and electric tools, and appliances, even garbage bins.

Tax authorities generally will present a list of items where a property investor can claim tax breaks on their depreciation from limited useful life items.

How can an investment property owner claim tax breaks and benefits on their depreciating assets?

There are two ways an investment property owner can claim tax breaks or benefits on their depreciating assets. They can be claimed through:

  • The prime cost method.
  • The diminishing value method.

With these two methods, investment property owners can claim the same amount of tax breaks or benefits from their depreciating assets over forty years. However, while these two methods may look the same they achieve very different short and long-term cash flow returns for an investment property owner.

Tax laws require investment property owners to choose just one of these methods on their depreciation schedule over the lifetime of their investment property therefore investment property owners need to understand that their choices will affect the cash flow returns from their depreciating assets before they can even claim tax breaks or benefits over the depreciation of their investment property. Investment property owners should consult with their accountant or financial adviser to maximize the cash flow returns on their investment property.  

The prime cost method.

The prime cost method is also called the straight-line method of deduction. With the diminishing value method, a set depreciation amount is claimed over the estimated income-generating life of an investment property until its full value is claimed. Using the prime cost method the deduction is based on the percentage of the cost of owning and operating an investment property in a year. Investment property owners can maximize their depreciation claim as this method provides greater tax returns in the later years of an investment property.

The diminishing value method.

The diminishing value method is a percentage of the balance an investment property owner has left to deduct on the ownership of their investment property. The diminishing value method provides higher tax deductions in the first few years of investment property owners with the tax deduction amount decreasing for the remaining useful life of an investment property.

When claiming tax breaks or benefits through the diminishing value method the investment property owner is claiming a larger share of an investment asset’s operating costs during the earlier stages of its useful life. The diminishing value method is commonly considered a much better option for investment property owners to take as it provides larger tax breaks and benefits in the initial stages of an investment property’s income-generating life.