Is my investment property too old to depreciate?
The question of “is my investment property too old to depreciate”, is a common question that is asked by many investors of old investment properties. The particular question is also largely misunderstood. The short answer is (generally) “no”.
You can claim depreciation on most investment properties. Therefore, old properties can benefit from depreciation. This is true as the majority of old investment properties have either renewed or updated structural items (e.g walls/roof) and plant & equipment items (e.g appliance, carpets etc.)
Old Investment Properties depreciation Components
Old investment properties, as do new investment properties, have two distinct depreciation categories, 1. Building Deductions (capital work i.e. structural elements e.g floor structure, roof structure and wall structure etc.) and 2.Building Allowances i.e Plant & Equipment depreciation i.e items that suffer from wear and tear and have a limited life.
Old things, in general, require replacing/repairing or updating. This is particularly relevant with old investment properties. Sometimes this is due to necessity rather than a tax strategy i.e ‘wear and tear’.
General wear and tear of items within properties over time require attention. In respect of wear and tear. The most common category that an old investment property falls under is ‘building allowance for plant & equipment’ i.e for renewed carpets, blinds. Generally high use items that require replacing due to everyday wear and tear from occupants/tenants.
Other than wear-and-tear reasons to update an old investment property (due to necessity), other old properties may have significant changes. Such changes may be from desire e.g the desired increase in cash flow potential etc. These properties may have full renovations, extensions, new rooms, modernised appearance, updated kitchen and bathrooms. Such updates to the old property would result in available depreciate at much higher values for the client. These renovated old investment properties would have both building deduction and building allowances available for claiming by the property investor.
What factors are important to consider when determining whether old investment properties are available for depreciation?
One factor and for simplicity, assuming that the property is ‘income producing’, ‘the date when the building works or installed was installed’ will determine whether it can be depreciated. Briefly the associated tax rulings also guide and stipulate what can and can’t be depreciated. One such example is the Commissioner of Taxation’s Effective Dates of in regards to plant & equipments’ effective life. That being the number of years since new, the item can be depreciated. There are others factors to consider but generally, this is why it is best to speak to an expert, such as a registered quantity surveyor (Build With K) that is specialised in tax depreciation of property investments.
Old Investment Properties that have benefitted by depreciation (i.eTax Depreciation Schedules)
Review some examples (below) of old investment properties and the depreciation that was claimable for the client.
1983 Renovation (reference A.)
For example, the 1983 renovated investment property (reference. A) had a general renovation including:
- renovated bathroom, kitchen, conversion of laundry to the second bathroom (including additional plumbing),
- internal painting, excluding painting to lounge ceiling.
- painting preparation including filling and sanding,
- tiling to wet areas and making good of work.
In this case, the client was able to claim total depreciation amounts to $59,000. 1930’s Renovation (reference B.)
1930’s dwelling, 2014 renovation
Another example of an old investment property at the upper middle tier of specifications includes a 2014 renovation of a 1930’s dwelling. The renovation included:
- a full renovation of existing dwelling,
- ground and upper level (not limited to): roofing, flooring, walls and ceiling, structural works,
- new finishes,
- fittings and fixtures and appliances.
The total claims for the client in this example amounted to $538,681. 1960’s Renovated property (reference C.)
1960’s dwelling with some updates
Lastly and in direct contrast to the second example above. A much smaller scale old property that benefitted from depreciation schedules, was a 1960’s example. This investment property included the following updates:
- Installation of front entrance air-lock,
- metal ribbed fencing to the driveway,
- kitchen cabinetry including chef island bench modification and
- a carport including secure-entrance.
In this final example, the depreciation that was found in this old investment property was $31,000 dollars.
What if I don’t know what has been renewed, updated or renovated?
What if the current owner doesn’t know the history of the property and what items may or may not be depreciated?
Both are good questions. With some due diligence and guidance from a registered quantity surveyor, such as Build With K (BWK). The client would be provided with the correct means to find such information.
Additionally, the appointed quantity surveyor, expert in tax depreciation would undertake their own due diligence before inspecting and during the inspection (a physical property inspection is best).
In regards to the inspection of a property for depreciation. Build With K, undertake a thorough 327 point physical inspection quality insurance check on all investment properties. Again this is the benefit of appointing an experienced quantity surveyor.
What value does a quantity surveyor have in regards to old property depreciation?
Assuming that the above also has the experience hopefully the examples above provide an idea and appreciation.
Going further, the notion of ‘my property being too old to depreciation’ is sadly echoed by some accountants and dismissed entirely for whatever reason.
Tax Depreciation is a specialised area. although accountants should be aware. As per the ATO tax ruling 97/25, accountants generally do not have the skills or experience to provide full undertaking of depreciation of property investments.
The takeaway point should be, ask whether your property investment is too old, before you as the client dismiss it as such.
“Is my investment property too old to depreciate?” Summary
If you think that your investment property is too old to depreciate, seek the guidance of a professional such as Build With K.
The detriment of not seeking the correct advice is too great. Again seek the advice from an expert in tax depreciation.
In rare cases where we have not found items in an investment property, or substantial value for the client, we have not charged.