Tax mistakes by investment property owners

tax-mistakes

I found this really interesting during the week as I know many of you are property investors. 

BMT Tax Depreciation, Australia’s leading provider of depreciation schedules, says investment property owners are making 3 costly mistakes on their tax returns when it comes to depreciation;

Getting the depreciation category wrong

There are two types of depreciation deductions: capital works (Division 43) and plant and equipment (Division 40). According to BMT, “it’s often not immediately clear which category an item belongs to, and in some cases an asset can be split between both.”

Capital works are claimed for the wear and tear of a building’s structure and the items permanently fixed to the property, such as doors and windows. Capital works are typically depreciated at an annual rate of 2.5 per cent over 40 years.

Plant and equipment items can be easily removed, and include things like blinds, hot water systems and furniture. The condition, quality and effective life will determine the allowances available for a plant and equipment asset.

“Many investors mistake floating timber flooring as permanently fixed to the building and therefore a capital works deduction when it’s actually removable, making it a plant and equipment deduction,” explains BMT. “This could mean the difference between $250 and over $1,300 in first year deductions.”

Assuming depreciation on older properties can’t be claimed

Research proves that new properties hold the highest depreciation deductions, but many people mistakenly think that depreciation can’t be claimed on older properties.

Legislation introduced in late 2017 means that depreciation of second-hand plant and equipment assets can no longer be claimed. Yet capital works deductions remain unaffected and make up the bulk of a depreciation claim on an investment property, regardless of whether it is new or second hand.

Second-hand property owners can still claim depreciation on all qualifying capital works deductions that, on average, make up 85-90 per cent of the total claim. They can also claim all new plant and equipment assets they purchase for the property.

During the 2019-2020 financial year, BMT found an average depreciation claim of more than $8,300 for our clients’ properties.”

Overlooking deductions

Many depreciation deductions are easily missed by the untrained eye, especially on assets that have been installed by others. Substantial renovations where all, or substantially all, of a building is removed or replaced can hold significant deductions… even when completed by a previous owner.

Some examples of substantial renovations include replacing foundations of the building, walls, floors, the roof or staircases. These renovations can hold tens of thousands of dollars in deductions for the new owner.

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