Tag Archives: tax depreciation

Buying an Investment Property?

Invest In a Unit or House?


Why are you exploring the possibilities of buying investment property? In Australia, the reality is the more you invest, the less tax you pay. Ultimately…the less tax you pay, it means you’ve got more money in your pocket to help drive your debt down.

Are you with me? Do you understand what is going on? 95% of what I am going to show you, you already know. The key distinctions about what makes buying investment properties is how you can put the property investments to work in your own life.

So if we apply this to your life, why would you limit yourself to one investment property? When you buy property/real estate today you are buying at a discount in relation to the future as this increase is called capital growth.

These are core structures for financing all of your property investments and wealth creation. In principle, it really doesn’t matter if you buy a house, renovated and sold it, if your investment money comes from business or wherever…

Buying investment property means you get your money working harder for you. The more you positively leverage you investments, the less tax you pay. Less tax…more you can drive your debt down, and more you can drive your debt down the more you can invest!

Why use equity to buy investment property? If you are already a home owner you may not need to provide a deposit to fund the purchase of an investment property because equity is the difference between value of your home vs how much you owe or borrowed from the bank against it

Want to understand what equity is and find out how to access equity in your own home and use it to purchase an investment property? Simpy push the play button and watch this video.

There are several ways to make the most of your existing equity buying an investment property without actually tapping into your savings. Unlocking the equity in your home can be an effective way to assist in purchasing a rental property to help build your wealth.

Buying an investment property…why invest in units is a common question asked by property investors regarding tax depreciation, so why does a unit get more depreciation deductions than a house?

buying an investment property
Are you watching others around you build their property portfolios and wondering how to buy your own investment property?

When investing in units you need to determine depreciation deductions available in a property, factors which affect
calculations include:

(a) Purchase price of the property
(b) Date which construction commenced
(c) Settlement date
(d) Land value
(e) Value of fittings and fixtures within property (where relevant)…

The overall cost to build residential units increases due to the amount of infrastructure involved in walls, services, etc by comparison to the less compact layout of a house or residential property which can make a significant difference to overall tax claim.

Units as investments often contain more fixtures and fittings than a house which means owners of a unit not only can claim items within strata unit (i.e. lights, carpet and dishwashers, etc).

Unit investors are also entitled to claim their share of the common property. Common property has been identified by the Australian Taxation Office (ATO) as areas within a complex or development which are shared between owners.

This includes areas and items such as:

  • Driveways
  • Pool and pool pumps
  • Outdoor furniture
  • Lifts/fire stairways

The following example compares a unit and a house (using same purchase price, construction date and settlement date), there is a difference of $15,000 in depreciation deductions over first five years of ownership.

Australian Taxation Office tax benefits: The ATO’s legislation recognises quantity surveyors as qualified to estimate construction costs for depreciation purposes.

As a building gets older its items wear out and depreciate in value. The ATO allows property owners to claim this depreciation as a tax deduction. Depreciation can be claimed by any property owner which receives income from their property.

Most investors are aware they can claim deductions on building structures of a unit (subject to age) including plant
and equipment items within such as:

  • Blinds
  • Carpets
  • Ovens
  • Range hoods
  • etc…

Many investors are unaware they can claim on common areas as well. Is it worthwhile for investors to consult a professional quantity surveyor to calculate the most accurate and financially returns for the property investor?

Accountants and real estate agents may on occasion estimate depreciation figures, although these professions lack construction cost knowledge and the capability to accurately determine depreciation deductions available in an investment property.

Most importantly the ATO does not recognise their figures in a tax return.

That’s why consulting a quantity surveyor which specialises in depreciation guarantees you…the investor to get the maximum legitimate deductions available.

A site inspection allows the quantity surveyor to establish maximum number of plant and equipment items within the property which includes measurements, photos and notes are taken to enhance the depreciation report.

If an investor is audited by the ATO, their depreciation claim will be supported by evidence documented at the time of inspection.

A quantity surveyor can determine correct proportion a unit owner is entitled to claim for common property based on criteria such as size, position within development (eg. penthouse or ground floor) and even its view based on relevant building plans.

If you decide to engage a quantity surveyor to complete a tax depreciation report on an investment property, any fee associated with the production of that report is 100% tax deductible.

Buying investment property means you would be in a position to pull equity out of your property(s) now and invest again. Why? Because you can…you also understand the process of paying less tax, plus how the chain reaction happens by continuing to invest.

Buying an Investment Property

Properties with Equity?

How to use equity to buy investment properties?


Properties with equity…what is equity? Equity is the difference between what your home is worth and how much you owe on it.

For example, if your home is worth $500,000 and you owe $200,000, you have $300,000 in equity. As you continue reducing the amount you owe on your home or value of your home grows (capital growth), your equity increases. It’s that simple.

Properties with equity and how to get equity to build wealth through property investment. Unlocking equity in your home can be an effective way to assist in purchasing rental property to help build your wealth.

Residential investment properties are a popular investment vehicle providing investment funding in the form of capital growth and rental income…

Properties with equity, what if you’re already a home owner? Firstly, you may not need to provide a deposit to fund the purchase of your next investment property. Imagine if you could leverage and harness the power of your home equity…

Home equity is the difference between your home’s market value and the balance of your mortgage.

buying an investment property with equity
Buying investment property with equity


What if you’ve owned your own home for a few years? There’s a good chance you have by default already built-up some reasonable equity (in context to capital growth), and this can be a valuable resource when it comes to buying property investment.

Here’s how it works. Let’s say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.

Assuming that you meet the loan approval requirements, a lender fund 80% of the property’s market value (potentially more if you are prepared to pay Lenders Mortgage Insurance LMI)…

Meaning the bank lends you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit. This can come from the equity in your existing home.

Let’s say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.

Properties with Equity in context to an investor because it means you can access up to 80% of your home equity (without the need to take out LMI), which equates to $100,000 in this example .

Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $100,000 of accessible equity in your existing home.

The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.

Alternatively some lenders lend to 90% of the property value less the existing mortgage, where lenders mortgage insurance would be paid on the amount borrowed over 80%.

You should note many property investment gurus say it is important to repay the loan on your home as soon as you can.

properties with equity
Properties with equity


The equity which is drawn down from your home to purchase an investment is tax effective, however any remaining debt on your home is not. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.

Properties with equity…property you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund other property purchases/buying investment property.

Contact your mortgage broker to help you work out how much equity you can access in your property and how it can be leveraged as a source of funding for your next investment property.

Properties with Equity

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