Nowadays, the income taxes on investment properties are too high. However, investment or rental property owners have found some options to reduce these income taxes levied on properties. Moreover, the Australian Tax Office (ATO) has provided various income tax benefits for real estate investors and owners. These are known as investment property depreciations.
Income taxes for real estate properties are calculated on the basis of the taxable income that comes in a year. After that the taxable income is calculated by deducting the allowable expenses from the generated income. Generally, the amount of revenue generated from property investments is a fixed amount, but, there can be some variations.
Investment property depreciation is a non-cash expense that increases the total expenses and reduces the taxable income. Property depreciation is based on the notion that a property and its belongings deteriorate over time. Hence, investment property owners are allowed to depreciate their property taxes on the basis of expenses incurred on maintenance.
Property tax depreciation both defers and reduces the income taxes. Tax depreciation defers income taxes from the time when the income is actually earned until the property is sold. Hence, many a times investment property owners use cost segregation to maximize investment tax depreciation. Cost depreciation is usually performed by expert quantity surveyors to fine tune the property depreciation schedule or report. Property tax depreciation includes the identification and quantification of all the depreciable components that qualify for short-life tax depreciation.
Tax depreciations for property are permissible for residential real estate properties constructed after: 17 July1985; and for non-residential/commercial properties constructed after: 20 July 1982. Preparing a depreciation schedule allows investment or rental property owners to allocate 20 to 40% of the cost on the basis of property depreciation. For example, a significant amount of the expenses can increase tax depreciation by 50% to 100% during the first five to seven years of property ownership.
Property depreciation is a powerful tool that is used for reducing the income tax particularly available to investment property owners. Real estate investors can amplify the benefits of real estate by utilizing the depreciations.
Investment property depreciation allow tax deductions and thus helps reduce the property income taxes in Australia and in every market size. The amount you can deduct through property depreciation depends on following factors:
Building Allowance: This applies to the properties built after 1988. This is the cost that was invested while building the original structural element of the property.
Plant Assets: This is the value of the plant and other assets purchased with the building. However, plant assets are not considered as an integral part of the building.
Pre-Purchase Renovations or Extensions: It is the actual cost of any renovations done to the original structure of the building by the previous owner.
Post-Purchase Expenditure: It is the cost of any investment done by the new owner after purchase.