Rental Property Newsletter 4
Tips, news, and inspiration for the savvy property investor
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How often should you replace things in your investment property?
One in five Australians own an investment property, but only a third own two or more. If you’re looking to make your first and subsequent investment properties a success, you need to ensure you’re replacing and repairing things right on time. Proactive repairs and maintenance keep your property in the best condition possible, and it can also help you attract high-quality tenants. Keep reading for an overview of how often you should replace things in your investment property.
Property maintenance vs capital expenditure
Repairs and replacements at your investment property generally fall into two categories: operating expenses and capital expenses. The way you deduct these expenses at tax time differs. Given capital expenses are often larger investments made in significantly improving your property’s value, these need to be deducted over time using a depreciation schedule. In contrast, operating expenses (repairs) are often smaller jobs that make up part of the regular upkeep of your property. These expenses can typically be claimed in full at the end of the financial year. If you’re unsure whether a repair or replacement at your property will be classified as an operating or capital expense for tax purposes, make sure you get clarification before spending any money.
What are typical repairs at an investment property?
Regular repairs and maintenance jobs at an investment property include painting, landscaping, garden and outdoor maintenance, general cleaning and chemicals for a swimming pool, replacement light bulbs and batteries for smoke detectors, cleaning or replacing HVAC filters and pest control. These items often need to be maintained or replaced annually, with jobs such as pool care and garden maintenance requiring more regular attention. Another key area of repairs in investment properties is water leaks and appliance breakdowns. While it may be an outlay to make repairs, these should always be done as a priority to keep your property in good condition and ensure your tenants have the same level of attention and care with looking after your property.
What’s classified as capital expenses in an investment property?
Examples of capital expenses for an investment property include major plumbing works, replacing or buying new appliances, HVAC installation, flooring, roofing replacements, new kitchen countertops, bathroom and kitchen renovations, and window replacements.
The frequency at which you make capital investments will depend on the age of your property and the quality of replacements you purchase. To keep your property in good condition, you should invest in the best quality possible. While this may be more expensive to begin with, the items can have a longer useful life which is better for your cash flow in the long term. Similarly, a well-kept property will attract quality tenants who pay their rent on time, which is also good for cash flow stability.
Understanding how often to repair and replace items in your investment property will keep it in top shape. Whether you’re looking to make big changes with capital works or you’re simply providing a fresh coat of paint and tidying up the landscaping, understanding how you can correctly claim deductions for these improvements will help you budget ahead while maximising your deductions at tax time. If you’re unsure how to claim a repair or capital expense on your investment property, make sure you speak with your accountant first.
What is property depreciation?
Property depreciation is a tax deduction that allows property investors to offset the decline in the value of their investment property (or properties) against their taxable income. After interest, depreciation is the second largest deduction available, so it can make a significant difference to your cash flow when you get it right. Many investors enlist the expertise of a quantity surveyor and their accountant to maximise deprecation deductions at tax time. But what if you want to do your taxes yourself? Or maybe you’re just after more information about deprecation? Keep reading for an overview of the most important things you need to know about depreciation.
What items are depreciable in an investment property?
On average, residential property investors can expect to claim $9,000 in deductions in the first full financial year of owning an investment property. Over five years, depreciation, when maximised, can be worth over $40,000. Two key areas are dealt with when calculating deprecation on your property: capital works allowance (or building allowance) and plant and equipment. The capital works allowance accounts for the cost of building the property. This may include materials such as concrete, brickwork, and timber. Plant and equipment account for items within the property, including ovens, dishwashers, air conditioners, carpets, and blinds.
What depreciation rate can you claim?
The claims you can make within capital works and plant and equipment differ based on the date your property was constructed and the specific plant and equipment installed at your property. The rate you can claim for plant and equipment varies based on the useful life of the items installed in your property. The deprecation allowance ranges from 2.5% to 4% per year for the original construction costs. For investors who purchased their property after 9 May 2017, the depreciation on plant and equipment already used in the property will have limited depreciation deductibles. Instead, these items are included in the purchase of the property and added to the cost base for capital gains tax (CGT) purposes.
Get advice about depreciation if you’re unsure
Like other areas of maintaining and adding value to your investment property, consulting an expert such as a quantity surveyor to help you maximise your depreciation deductibles is a good way to get the best cash flow possible out of your property. Not only can a quantity surveyor develop a thorough depreciation schedule, but they can also help you claim missing deductions from previous tax returns. A quantity surveyor can also help you with pro-rata calculations for the first year of ownership. Further, with the ability to split depreciation schedules based on ownership percentages, investors who own properties with one or multiple parties can ensure each owner maximises their deductions.
Depreciation deductions on an investment property don’t need to be a guessing game. You can maximise your depreciation rate by working with a quantity surveyor or taking the time to thoroughly investigate your property. This will help you derive more cash flow from your property with minimal effort or outlay. Quite often, the money spent on getting expert advice can be covered through depreciation deductions, making it a smart investment toward the success of your property portfolio. If you’re unsure about depreciation deductions, speak with your accountant or a quantity surveyor today.
Remember, these articles do not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.
