Property investment tax deduction that delivers $10,000-plus

Property prices are under pressure in several cities, but many of Australia’s 2.2 million real estate investors are happy in the knowledge that their most lucrative period of the year is approaching.

Tax time, when a handy chunk of property investment expenses are reimbursed through tax refunds, begins on July 1, and now is the time for landlords to spend up if they want a juicy refund. Prepaying mortgage interest, paying landlord insurance, and spending on repairs and maintenance are among the strategies to consider before June 30.

But there’s one big tax tactic that can be the daddy of all deductions. It’s something many investors don’t maximise, and it’s the number one thing I suggest to any landlord seeking to max their tax refund.

It’s a depreciation schedule, also known as a deprecation report, and it outlines deductions investors can make for the declining value of many items including curtains, carpets, garden gnomes and even a house’s bricks and mortar.

Cheap online reports can cost investors $200-$300, while comprehensive reports set you back more than $700. But it’s a one-off for the life of an investment property and is tax-deductible itself.
Almost all landlords who do one get many times that money back through tax refunds over several years.

However, analysis of Australian Taxation Office depreciation data and client deductions by industry big gun BMT Tax Depreciation found about three quarters of investors don’t make the most of depreciation and leave deductions on the table. And only half of investors claim for capital works deductions (the bricks and mortar bit), which are typically 2.5 per cent of the construction cost written off each year for 40 years, according to ATO data.

That means a new investment property with a structural component of $400,000 will deliver its owner a $10,000 capital works deduction each year. And that’s before carpets, curtains and other stuff.

Some investors have been put off in recent years after the government banned depreciation deductions in second-hand properties in 2017, so only people buying new properties get the full benefit. But the rule changes did not extend to capital works deductions, which represent about 90 per cent of all depreciation claims.

Older properties often don’t deliver big capital works deductions, and a good tax depreciation company will tell you in advance if getting a report isn’t worth it. However, previous renovations can be depreciated too, as can the costs for scrapping items that were thrown out in those renovations.

Investors who have held their property for a while but haven’t got a depreciation report are able to back-claim for two years, which could mean a massive potential deduction.

Arguably the best thing about depreciation is that it’s a non-cash deduction, which means it doesn’t drain any money from your bank balance in the way interest and insurance do. Getting tax deductions worth $10,000 or more without spending it is pure financial pleasure.

And it will offset some of the pain of potential price falls and cost increases as interest rates rise in the next financial year.