Property Ownership

What Is a Tax Depreciation Schedule?


Tax Depreciation

One of the many benefits of property investing is the ability to reduce your overall tax burden at the end of the financial year. In doing so an investor can get more money back into their pocket. One way of doing this is to purchase a tax depreciation schedule. Many investors use this schedule in order to minimise maximise their depreciation but what is it and should you purchase one?

What Is a Tax Depreciation Schedule (TDS)?

A tax depreciation schedule is a report which outlines all available depreciation on a property. This report is purchased from a tax depreciation company and is property-specific. Given property is depreciating over time, the investor is able to capitalise on this by owning one of these reports.

There are two methods used within a tax depreciation schedule. An investor can choose which method they go with but the depreciation claimable will change over time.

The prime cost method assumes that the value of the dwelling (depreciating asset) decreases consistently. This means you claim a fixed amount of depreciation per year while holding the property or for the lifetime of the schedule. The formula for this method can be seen here: Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life)

The diminishing value method assumes that the dwelling depreciates greater earlier on. This means you can claim more during the earlier years of your schedule. However, over time the amount claimable decreases sharply. The formula for this method can be seen here: Base value × (days held ÷ 365) × (200% ÷ asset’s effective life)

Diminishing Value Bar Graph

Which is better? Neither method is better than the other. In order to determine the value of each method, an individual’s circumstances need to be taken into account. Fortunately, when you purchase a tax depreciation schedule both methods are included in your report. Therefore, you can obtain a report and decide at tax time which method is going to suit you better.

What Can You Claim?

A tax depreciation schedule is able to depreciation from two areas. The first is called plant and equipment assets. These are items that are easily removable from the property such as carpet and blinds. These assets have an effective life which is set by the ATO and can be depreciated over time. The second area of depreciation is called capital works. This refers to the structure of the building and is considered to be permanently fixed to the property. This includes things like the kitchen sink or doors. This depreciation type reduces your cost base and is gets smaller each year.

Type of Schedules

There are two ways to obtain tax depreciation schedules. Each option has its pros and cons, and it is up to the investor to decide which suits them best.

The first option is for an investor to get an automated/desktop report. This report can be purchased quite readily and simply takes into account the property’s built to date, configuration, construction type. The benefit of this approach is that the investor doesn’t need to organise for someone to enter the property. This option is also significantly cheaper. The negative of using this approach is that it is a generic report and may not encapsulate the entire depreciation available on a property.

The second option is to get a qualified quantity surveyor report. This report is obtained by having a quantity surveyor visit your property to complete the report. They will go through the entire house to identify depreciable items. Using their expertise, they can maximise depreciation and more accurately assess your property. You will need to organise a time for them to visit the property and the reports are more costly.

Both options are viable for an investor and can be used to obtain a tax depreciation schedule. If you have the funds to purchase the quantity surveyors report it may be more beneficial for you. As you would receive a more accurate report for your property.

The Cost

The cost of purchasing a tax depreciation schedule varies depending on the company and method chosen. If you purchase an automated depreciation schedule you can expect to pay anywhere between $200-300 (though these prices may vary). If you choose to purchase a quantity surveyor’s report, you can expect to pay between $500-800 for each report (though again this can vary). There is a clear difference in price between the two options. Though, there may likely be a clear difference in the accuracy and quality of the report you purchase. It may be viable to contact numerous companies and determine which option or company best suits you.

Is It Worth It?

So, it sounds like a tax depreciation schedule can be extremely beneficial for an investor but are they worth it? It really depends. It is important to be aware a couple of things before purchasing this schedule.

Firstly, not all properties have high levels of depreciation available. The newer the property the more depreciation the property will have. So, if you have an older property, it will have less depreciation. So, the purchase of one of these reports will need to be determined by the value it could provide the investor. For example, a 40-year-old property has claimable depreciation of $1000 per year. While a 20-year-old property may have claimable depreciation of $2500 (assuming the prime cost method). So, the newer the property the more likely the property will have more claimable depreciation. Does this mean you should only buy a new property? Most definitely not, as discussed previously, historically, established properties have greater capital growth.

Secondly, the depreciation claimed needs to be deducted from your cost base for capital gains purchases. What does this mean? If you sell the property you will need to deduct the depreciation claimed off of your base cost. This will subsequently increase your capital gains tax. For example, let’s assume you purchase an investment property. You purchase a tax depreciation schedule and are able to claim a tax of 4k per annum. You hold the property for 5 years and claim 20k depreciation over this time. This means some of the 20k claimed will be reduced from your cost base and increase your capital gains tax. (Note, this depends on how much of the 20k claimed was plant and equipment or capital works).

The Verdict

There are numerous things to consider when looking to purchase a tax depreciation schedule. The use of this report can be beneficial if it suits the requirements and needs of the investor. However, the purchase of this report should be considered on a case-by-case basis. Hopefully, reading this article it has helped inform you on the potential benefits of using one of these reports. (Please note, none of the information provided is tax advice and is simply used for educational purposes).

Want to see other examples of significant property growth elsewhere in Australia?