Tag Archives: land value

What is Tax Depreciation?

Firstly, lets take a closer look at tax depreciation via the role of a quantity surveyor…

Quantity surveyors are recognised by the Australian Taxation office as qualified to assess and report construction costing and the depreciation of a building and its fixtures.

Maximising a depreciation claim requires a thorough understanding of the Income Tax Assessment Act, applicable income tax rulings, Case Law and specialist construction costing skills.

Engaging a quantity surveyor ensures you are minimising risk and claiming the maximum amount of deductions available.

In preparing a professional capital allowance and tax depreciation report a qualified and highly experienced quantity surveyor uses information provided by you (the client)…

Quantity surveyor uses their own expertise in estimating construction costing, and a detailed inspection of the property to identify every claimable item.

Extensive knowledge of relevant tax legislation and years of experience interpreting such legislation means always reporting the maximum depreciation available to ensure the investor claims every dollar to which they are entitled.

Qualifications of Quantity Surveyors:

  • Degree qualified with a Bachelor of construction management as a minimum
  • Members of the Australian Institute of Quantity Surveyors
  • Extensive experience inspecting, assessing, researching and calculating depreciable deductions
  • Are available to you and your advisers for ongoing advice and assistance…

Can your own accountant estimate construction costs for tax depreciation purposes?
Accountants can apply actual costs, but are not qualified to estimate construction costs.

Tax Ruling 97/25 of the Income Tax Assessment Act (1997) specifically states that “valuers, real estate agents, accountants and solicitors generally do not have relevant qualifications or experience to make such an estimate.”

In order to maximise your depreciation claim you need to have a report prepared by an appropriately qualified professional quantity surveyor.

How much can you expect to pay for a tax depreciation report? You could expect to pay anywhere between $600 and $1,000 for a tax depreciation report for a standard residential property in either metropolitan or regional areas, depending on who you speak to.

Some companies offer tax depreciation reports in the $300 to $500 range; however you need to be careful and make sure that:

  • Their staff have the relevant qualifications and experience
  • Qualified quantity surveyor will conduct a full inspection
  • You won’t get hit with any extra fees for council searches or for including renovation costs in the report
  • Quantity surveyor knows how to fully maximise your capital allowance and tax depreciation entitlements…

What should you look for in a quantity surveyor? First and foremost, your quantity surveyor should conduct a full inspection of the property and ideally 5 years experience in preparing capital allowance and tax depreciation reports which are tailored specifically to the property investor’s financial situation.

A tax depreciation report is not just a table of costs and dates; it is a complete schedule which requires the utmost attention to detail both in the office and on site.

Your quantity surveyor should be able to provide over phone estimates of potential claims you could expect to make as property investor and follow through with an accurate report.

Your quantity surveyor should be available for consultation to you and/or your accountant as often as required either before, during or after the report is complete.

The quantity surveyor should also be responsible for arranging access to the property and should bear costs of any travel expenses or council/authority searches which may be required to fulfil their service promise to you.

Finally, your quantity surveyor should also have the integrity to advise you not to proceed with the tax depreciation report if they feel the exercise will not stack up in your favour.

What should you look for in a tax depreciation report? 

A tax depreciation report is much more than just a table of costs.

In order to fully maximise your claim and to save your accountant time (which saves you money) you need to ensure your quantity surveyor provides the following:

  • Summary of property information
  • Methodology explaining how the report was compiled
  • Detailed list of plant and equipment assets
  • Schedules for diminishing value method
  • Schedules for low cost and low value pooling
  • Schedules for prime cost method
  • Nominated effective lives for every each plant and equipment asset
  • Nominated depreciation rate applicable for each plant and equipment asset
  • A table of division 43 building works, including any renovations by the investor
  • 40 year projection covering you for the life of the building

Won’t any quantity surveyor be able to provide a report with all the features listed above?
Unfortunately, no because some quantity surveyor firms like to cut down on the resources required to produce a tax depreciation report.

They may not conduct an inspection of premises which means they can’t put an accurate value on plant items, or they may not spend the time needed to provide the full service as outlined above.

This often results in a cheaper (inferior product) and although the report may save you $200 on fees, it could end up costing you thousands in overlooked tax deductions. Only a handful of companies provide a fully rounded service as detailed above.

Why is it important to have a quantity surveyor inspect the property? Wouldn’t it be cheaper for me to do a self assessment?

Quantity surveyors are specifically trained to accurately measure and assess rental properties to extract the highest tax depreciation claim available to the investor.

They know exactly what they are looking for as soon as they arrive on site. Every tiny little detail in the property is assessed including things like door closers, smoke alarms and even shower curtains.

The quantity surveyor will also note the brand, model and size of all of the big ticket items such as kitchen appliances, air conditioners and hot water systems.

Every square mm in the house is measured to ensure nothing is missed. Without a full quantity surveyor inspection you run the risk of missing thousands of dollars in missed tax deductions.

What information will you need to provide my quantity surveyor?

Once you’re satisfied your quantity surveyor provides a premium service all you need to do is provide:

  1. Full name, address, contact numbers and email address
  2. Your accountants name
  3. Rental property address
  4. Property manager details
  5. Purchase price, settlement date and renovation details (if applicable)

Other than that your quantity surveyor should be able to follow up on council searches to find out the age of the building, land value and any other relevant details to streamline the process for you.

My property has tenants living in it, will this be a problem? If your quantity surveyor  is committed to looking after your property investment, and this extends to being flexible with your tenants so they are not put out or upset by our visit.

A professional quantity surveyor sets this up with your property manager and your tenant to find a time which is suitable to do a full and thorough inspection of the property.

How long does the whole process usually take? Depending on availability of your tenants, usually gain access within a week of you giving instruction to proceed. On average the turnaround from inspection is approx 5-9 business days.

My property has been subject to pre and post-purchase renovations. Will this be factored into the inspection and preparation of the report? Definitely. It’s all about maximising your tax deductions and putting as much money as we can back in your pocket.

You will be asked at the enquiry stage if you have added any improvements, which is also included in the report at no extra cost. The inspection and historical records search is done in an attempt to uncover any works previous owners may have carried out .

If quantity surveyor finds the right evidence, their expertise allows them to estimate a value which can be included in your tax assessment.

What if you lived in the property for a number of years before renting it out; will there be any tax depreciation left? It would depend on how long ago you bought property, but in most cases yes.

The goal is to maximise tax depreciation deductions immediately upon purchase of the property. However, as you are unable to claim tax depreciation for the period you were living there…

Quantity surveyor re-structures report (within ATO guidelines) to minimise depreciation claimed for the period you occupied building and maximise depreciation in the period it was leased, or available for lease.

What happens once the report is complete? The invoice is settled and a soft copy will be emailed to you and your accountant.

The best part about reports is they provide a complete summary of claims for your accountant to include in your tax assessment.

This saves your accountant time, which in turn saves you money over and above the tax savings represented in the report.

Ask your quantity surveyor to work with your accountant at all times either before, during or after the report is complete.

How does having a tax depreciation report affect capital gains tax or CGT?

What if you don’t claim the division 43 capital works allowance, because you’re afraid it would reduce your cost base and therefore increase their capital gains tax liability if/when they sell the property.

There are a couple of steps you can do as a property investor:

  • If you own the investment for more than 12 months, you are eligible for a 50% discount on your CGT liability
  • Claiming full depreciation benefits of an investment from the beginning gives you opportunity to use additional cash flow
  • Perhaps you can reinvest
  • Pay down liabilities etc…as opposed to realising a potential saving in your CGT liability at some time in the future, if/when you dispose of the property

Remember, a dollar in your pocket today is more valuable (holds more purchasing power), than a dollar sometime in the future. Therefore it makes sense to claim every deduction available to you as early as possible.

When you do any work on your investment property i.e. refurbishment, renovations, when is it repairs and maintenance, when does it need to be depreciated? This can sometimes be a little bit of a grey area, and you need to make sure you are not claiming improvements as repairs, and vice versa.

Generally speaking, a repair is something which restores an asset back to its original condition.

For example: if you bought a brand new investment property, and the tenants scratched some paint off the walls while moving furniture, when you paint that wall you are repairing or restoring it back to the condition it was in when you first bought it.

This would be considered a repair, which you could write off immediately. However, if you bought an existing property and decided to paint walls in an effort to improve condition of building from when you first purchased, this would be considered a capital improvement which you would write off annually at 2.5% per annum (for a residential property).

Under what circumstances would you need to have a tax depreciation report re-done?
Usually a tax depreciation reports lasts for the life-time of the building, assuming it remains in the condition it was in when initial inspection is completed.

If you do minor improvements over the years such as a new hot water heater or you added swimming pool or garage, simply take your receipts along to your accountant and he/she will include them in your yearly tax assessments.

Only time you would need a second report was if you carried out substantial renovations or refurbishments from the time original tax depreciation report was compiled.

Tax Depreciation

Buying Investment Property And The Property Cliches

Many Australians are buying investment property armed with nothing more than poorly understood property cliches, are these aphorisms always true?

Is property investing your business or passion? I personally love seeing property investors make bank. Seeing property investors make ill-informed property decisions and costly mistakes can be avoided with greater knowledge and understanding of property cliches.

Regardless of your property investing experience and the type of property you’re now researching or planning, here are some real estate and hard-won investing lessons I’d to share with you…

So what are property cliches? Are you aware of property cliches and why you’d want to ignore them in your property research, planning and transactions?

Over the years residential property has proven to be one of Australia’s best performing investments. Buying property is considered the biggest investment decision…a cliche?

Surprisingly, many Australians buy property with little or no investigation into the factors which drive individual property performance.

Misinformation is prolific and the cause of many poor investment decisions. Even well trusted beliefs can prove misleading for the most experienced property investors.

What if you questioned the validity of property clichés and commonly held assumptions? Would it mean as buyers you’d make better informed decisions? What are the investing factors which differentiate a good investment property from a poor one?

property cliches
Are you buying investment property armed with nothing more than poorly understood property cliches…

Location, location, location, possibly the most well-known property cliche, often quoted as the quintessential factor when it comes to property selection.

What many buyers fail to realise is location is about far more than just the right suburb or even the right street; it is as specific as the lot number or position in a block of units.

Neighbouring properties may appear to be similar in many ways, factors such as aspect, orientation, floor plan, levels of natural light and security, all have an important impact on property value beyond the underlying land value.

Hot spots, it’s not uncommon for property investors and buyers to chase the next big hot spot with hopes of making a quick buck. Hot spots aren’t all they’re cracked up to be right?

By definition a hot spot is a suburb or area predicted to benefit from rapid short-term gains in value. However, despite an initial spike, a hot spot is usually characterised by slow or limited growth in the long-term that often eventually undermines short-term gain.

Because of the high transactional costs of buying property investments,  real estate should be viewed as a long-term plan, which means hot spots often fail to provide the exceptional growth buyers hope for…

Timing and analysis of historical sales data clearly shows that it isn’t when you’re buying investment property, so what you buy is that an important factor?

Purchasing a property based on price alone is no guarantee of future capital growth or performance. Selecting the right property with the right profile for growth ensures property owners buy an asset which performs irrespective of wider market conditions.

Keeping up with the Jones, some of the best performing properties aren’t glamorous. When buying investment property don’t be fooled into thinking the more you spend the greater the likelihood of good capital growth.

In fact, buying a flashy new property or one considerably above a suburb’s median price can limit buyer demand and subsequently growth.

When investing, don’t buy property which appeals to buyers’ aspirations. Buy property which caters to financial and social requirements of tenants and buyers in the area.

Sitting on the sidelines, during uncertain economic times it’s common for buyers to withdraw from the marketplace in anticipation of property prices reaching the bottom.

Adopting a wait and see attitude to buying and selling real estate can be disadvantageous.

The reduced competition during a downturn can create really good opportunities for savvy property investment buyers. History shows most buyers tend to return to the market after a positive shift in sentiment and later on as the values have already occurred.

Property investors which have bought well needn’t worry about selling in a downturn either as quality real estate assets are always in high demand.

So don’t wait for others to make the first move. Base your decision to buy on your personal financial circumstances, not market sentiment.

Buy the worst house on the best street, can seem like a cost effective way of buying investment property in a sought after location, however, it is not without risk…

property renovation cliche
Property renovation cliche…

The goal is commonly to transform property from worst to one of the best properties on the street. However, any saving on initial purchase is often very quickly absorbed by renovations to improve the property.

Conversely, deciding to leave the property in its original purchase conditions can have negative implications for the property, which will be reflected in future capital growth.

It may actually be more cost-effective to buy a better property and forgo the expense, stress and risk of renovating.

Think outside the box, when it comes to investing in property there is no need to reinvent the wheel.

Investment properties which offer ROI aren’t always architecturally unique or modern. In fact, they are more commonly well-located inner city period and pre-1970s properties.

Property selection isn’t a guessing game, so stick with tried and tested property selection methodologies that rely on empirical sales evidence, not speculated or high-risk returns.

A renovators dream, as renovation property programs continue to hit Australian television screens the punter or DIY handyman considers the prospect of buying and renovating to make a quick buck.

The novice renovators often underestimates the commitment required to transform a property, which can cost them significantly.

value investing
Novice renovators surprised by value investing…

When deciding to renovate it is important to consider where the property is located, the type of property e.g house or apartment, whether it will be a rented investment property or owner-occupied…

Who is the target market, potential buyer or tenant of the property? Sellers should renovate to their target market…

It is also important to be wary of overcapitalising in a property, as the amount spent on renovations may not offer an equivalent return in the increased value of the property.

A good rule of thumb is to not spend more than 20 per cent of the property’s value on renovations.

Up and coming, closely related to hot spots concept, which is often used for suburbs expected to perform well on the basis of proposed future improvements to infrastructure and/or local amenities such as roads, school, shopping complexes, sporting facilities etc.

When it comes to property, one of the golden rules is never speculate. Purchasing on the basis of planned or proposed future improvements is risky.

Hundreds, if not more, development proposals are put on hold or denied every year and when approved can take many years to build. There’s no guarantee the added amenity will add positive weight to local property prices.

The most diligent measurement for an asset’s future growth is to look at its performance history. Remember to consider this when looking at hot spot or up and coming suburb.

If you feel that you are ready to step up to the next level, stop trying to figure it all out on your own and make sure you don’t go around the calender another year without seeing success...click here now!

We might be able to help by mentoring you and giving you a step-by-step system to follow and help you get to the next level.

Property Cliches