How would you explain ‘depreciation schedules’ to someone who’s never heard of this?

The ATO requires Australian taxpayers to pay tax on rental income. And as such, they allow taxpayers to claim tax deductions on losses. These deductions include interest on your investment property loan, water and electricity supply charges, strata and council levies. Last but not least, they also allow you to claim depreciation. How? A tax depreciation schedule organised by a suitably qualified persons such as a Quantity Surveyor, allows them to claim the wear and tear on the building, fixtures and fittings of the rental property for up to 40 years.

As is important to JD Capital, the Duo Tax team are made up of avid property investors – it’s crucial that our property partners are experienced property investors themselves, so they can best support us. You can click to play the video above, to learn more about the Duo Tax team.

For newbies to knowledge around depreciation schedules, are there any tips you have in this space for investors? How can we achieve the best outcomes with property investing with your advice?

Claiming depreciation on a particular property is never the same. You need to factor in many variables such as whether it’s a new or second-hand property, the age of the property, whether there were any renovations done and much more. The best thing an investor can do is to ask a quantity surveyor like us to provide an initial estimate to gain an understanding whether there are significant savings for the property. Most often the best time to organise a report is around time of settlement but not to fret if you have a property you’ve held for some time. The ATO allows you to amend tax returns to add depreciation for up to 4 years in some cases.

What is the exact process of a depreciation schedule – Is it all spreadsheets with some immersive onsite quantity surveying? It looks like it can be a very in depth process… calculating every nook and cranny of a property and how it ‘depreciates’ over time… every cupboard… every garage door… is that correct?

In a simplified way, trained inspectors go out and complete a property survey, measure the size of the property, take notes of what is depreciable, take photos and relay back to the quantity surveyor to prepare a report based on these details. The depreciation would then be calculated based on our judgement of the quality of build, size, the quantity of each asset in the property, and type of construction.

The calculation for how it depreciates is quite simple. The complexity comes in calculating the cost and determining what parts are capital works and what parts are depreciable assets and then maximising the values that the investor can claim on so that they can get the best depreciation value. Not to mention, a thorough assessment of cost of materials can have large impacts on depreciable value, especially in this current climate at time of writing this.

Does a suburb’s growth trajectory impact a property’s depreciation schedule / i.e. ‘tax benefit’ to an investor?

A suburb’s growth will only affect the depreciation schedule if previous owner renovations are done to the property. This creates ambiguity to the costs of the upgrades which allows for quantity surveyors to determine how much was spent. Also, as the growth increases, generally, owners will want to spend more on renovating the house to uphold the standard of construction for both resale purposes and keep tenants happy, which then can yield more depreciation and a higher property value.

Are there any other surprise ‘plot twists’ that investors would be surprised and/or delighted to learn from?

If you’re doing a knock-down rebuild, you should look into a depreciation schedule to assess any scrapping value that could be used to claim on your tax return. A lot of investors don’t think of this before knocking their property over.

What’s the one piece of advice you would give to a vendor before approaching their first depreciation schedule?
If they buy brand new or off-the-plan properties, you will be able to claim a lot more depreciation on both the building costs and plant & equipment. However, if they purchase second-hand properties, they cannot claim on plant and equipment anymore because of the ruling changes in May 2017, where the ATO no longer allows investors to claim second-hand plant and equipment depreciation.

They also should know that when they live in their first home that they have purchased, and later decide to switch it to a rental property, the property is then deemed as second hand as well, and will disallow them to claim depreciation on plant and equipment. Noting, the building cost depreciation component is not affected.

You also manage construction estimations and property valuations – how would you describe the breadth of your work, and what drives you as a business?
We understand that by only focusing on depreciation schedules, we are only helping property investors with a small part of their journey. By expanding into construction estimations and property valuations, we can drive a lot more value for our investors while allowing them to work with a single point of contact for more services. The decision to expand into these other services was that we knew there were scenarios in which we had the skillset to help but we couldn’t help certain investors.

We feel that our extension into Property Valuation allows us to cover all areas of professional services that intermix property, construction and taxation, allowing customers and professionals to synonymously align with us.

You’ve got some really handy construction cost calculators and rental property depreciation calculators on your website – what do you love most about these?
I think it’s always important that you should be able to try before you buy. Therefore, whether it’s a free estimate through our calculators or speaking to one of our reps, these are designed to give you an idea of what you could potentially claim based on the property you either have acquired or you’re looking to acquire.

Your team are a mix of property investors themselves – at JD Capital, it’s important to us that our property partners are experienced property investors, who have walked the walk, so they can best support us. What success stories do you have within your team? What impact do you feel this has on your clients? And, client experience?

I think it’s important to have walked in the shoes of your clients. There are a lot of nuances and subtleties to the property investing journey that you simply can’t understand unless you experienced it yourself. A large portion of our team invests or has invested in property themselves, so they can speak from a lens of empathy and understanding when communicating with them. Personally, Duo Tax was born off the back of my (lack of) awareness of depreciation schedules and how much value that drove through my own property buying journey. I am on an ongoing journey to dive deeper into property, experiencing tax implications by way of:

• Selling rental properties, triggering a CGT (Capital Gains Tax) event

• Selling my own home

• Purchasing property in a SMSF (Self-managed super fund), individual and Unit Trusts

• Regulatory auditing of properties via SMSF

• Moving into a rental property triggering CGT

• Purchase of an office in Family Trust

• Renting the office to the Company

• Completing a fit-out for an office and the depreciation benefits

These experiences do not allow me to advise on all areas of taxation (aside from depreciation and valuation assessments), but they do give me a comprehensive understanding to better educate my team and our direct customers.

This has been eye-opening!… How can we learn more?

Our relentless push for education in tax depreciation, property valuation and property investing is all captured within all that we do at Duo Tax, including social media and our YouTube channel. I share all of this willingly to better help investors alike. You can visit us at youtube.com/duotax to learn a lot more!

And, you can visit the Duo Tax website here