Different types of property investment in New South Wales
When you buy a NSW investment property, there are two main ways you can set it up:
This is a situation where the rental income you make from the investment property is greater than the costs of running the home (including home loan and maintenance costs). Essentially, the property runs at a profit, with a healthy rental yield (income expressed as a percentage of the property’s total value).
However, when values rise, rental yields contract, and it can be more difficult to establish positive cashflow investment property in New South Wales.
Negative gearing is the opposite of positive cashflow, wherein a property runs at a loss as the interest on the home loan exceeds the rental income. This carries benefits in the form of tax deductions, and is popular among investors that are making the most of capital gains. It allows them to manage investment property at a short term loss mitigated by tax breaks, but produces long term gain.
Negative gearing has been popular in New South Wales as values have risen so quickly, however your own investment strategy is going to depend entirely on your income. The team at LJ Hooker home loans is on hand to help you understand these concepts and provide advice on the best way forward for your NSW investment.
We are often asked “what items can you claim a full deduction for, and what items are ‘depreciated’.” Basically, an ‘Expense’ is something that may be entitled to an immediate deduction in the income year you incur the expense. A ‘Capital Works Deduction’ is an expense of a capital nature that is depreciated over time and/or may form part of the cost base of the property for capital gains tax purposes.
The Australian Taxation Office (ATO) allows an owner (or owners) to claim deductions for expenses incurred when earning rental income. Depreciation allows the owner/s to claim a deduction due to the wear and tear of a building structure (capital works deduction) and its fixtures (plant and equipment depreciation) over time. Depreciation is described as a ‘non cash deduction’, meaning the investor doesn’t need to spend any money to be able to claim it.
An investment property doesn’t need to be new to claim depreciation, however you can’t claim depreciation for a property where construction commenced prior to the 15th September 1987.
Also, if you purchased a second-hand residential investment property after 9th May 2017 you’re unable to claim depreciation on existing second hand plant and equipment assets, or removable and mechanical assets, eg: air cons, blinds, hot water units, dishwashers etc. You can however, claim for ‘capital works’ deductions like depreciation to the fixed structure of the property, eg: the actual building such as doors, roofs, basins, windows, retaining walls etc.
What is a Tax Depreciation Schedule?
A Tax Depreciation Schedule is a professionally produced document highlighting items of plant, equipment and capital costs that may be depreciated, eg: the construction of the house, fittings and fixtures, fencing etc. It incorporates the value of each depreciable item including delivery costs, installation costs and the cost associated with bringing the plant into full operation.
Deductions are available for forty years and you can claim depreciation for renovations and any new plant or equipment also. If a property owner has not been claiming depreciation or maximising their deductions, the previous two years tax returns can also be adjusted and amended in order to do so.
Who can prepare a Tax Depreciation Schedule?
Many people think that their accountant can prepare a ‘depreciation schedule’. However, the ATO specifically states that ‘Accountants, Solicitors, Real Estate Agents and Valuers are NOT recognised to estimate construction costs for depreciation purposes (TR 97/25).
To ensure you’re claiming all the associated expenses related to depreciation of your rental property we highly recommend that you obtain a Tax Depreciation Schedule. You could receive deductions of thousands of dollars per annum.
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