When purchasing an investment property, many investors wonder whether they need to obtain a depreciation report before settlement. While it's not a legal requirement, having a depreciation schedule ready can provide a strategic advantage, allowing you to maximise your tax deductions from the outset.
Why Consider a Depreciation Report Before Settlement?
A depreciation report outlines the tax deductions available on a property’s plant and equipment (Division 40) and capital works (Division 43). Securing this report before settlement can help you understand the potential tax benefits and adjust your investment strategy accordingly. Many investors mistakenly believe that these deductions only apply to new properties, but even older properties can yield significant benefits if they've been renovated or improved post-1987.
How This Works in Practice
Consider a scenario where you're purchasing a 3-bedroom townhouse in Richmond, Melbourne, built in 2005, for $900,000. By commissioning a depreciation report before settlement, you discover that you can claim approximately $15,000 in deductions in the first year alone. At a 37% marginal tax rate, this equates to a tax saving of $5,550 in the first year. Having this information before settlement allows you to factor these savings into your cash flow projections.
Professional Insight
In our experience, obtaining a depreciation report before settlement can be particularly advantageous if you're planning renovations. One thing we frequently see is investors underestimating the value of plant and equipment in older properties, especially if the property has been updated. What most investors don't realise is that engaging a Chartered Quantity Surveyor early can uncover deductions that are easily overlooked, such as those for shared areas in apartment complexes. Furthermore, understanding your potential deductions early can influence the financing strategy you choose.
When Does the Answer Change?
- Post-9 May 2017 Acquisitions: If you purchased a second-hand residential property after this date, Division 40 deductions on previously used plant and equipment are no longer available.
- Pre-1987 Buildings: Properties built before 1987 may not qualify for Division 43 deductions unless they’ve undergone significant renovations.
- Commercial Properties: Different rules apply, and a depreciation report can reveal substantial Division 40 and 43 benefits.
- SMSF Purchases: If you're buying through a self-managed super fund, depreciation can still apply, but specific rules govern these deductions.
When Should You Seek Professional Advice?
Professional advice is crucial when considering the timing and strategy around depreciation claims. A Chartered Quantity Surveyor can accurately assess potential deductions, while your accountant can integrate this into your broader tax strategy. This partnership is vital for ensuring compliance and maximising your investment returns.