A Beginner’s Guide to Depreciation in Property Development

| September 30, 2012
Property market

Property market (Photo credit: Alan Cleaver)

If it were as easy to make money off a developed property as renting out some apartments or offices and sitting back and profiting off the rent, more people would do exactly that.  Many times when looking to wisely invest money, people turn to real estate armed with the basic knowledge that property values fluctuate and that a large financial reward can be reaped for a lesser investment.  There is obviously truth to the fact that the property game can be rewarding, but not often through rental income alone.

When looking for an investment property to develop, whether a renovation, demolition, or ground-up project, it is wise to not only try the taps and tap the beams, but do a little due diligence on the property’s future potential as a financial asset.  Did you know that the closer your purchase price is to the construction value of a property, the greater benefits you’ll receive come tax time?  These numbers are just as important to have when looking for an investment property as the current price tag.  True developers are not only playing the property game but working the tax system to the best of their ability.  Take the concept of depreciation for example; while crucial in the earnings scheme of all large-scale property developers, individuals involved in property development often miss out on earnings by failing to properly claim it.

The basic concept is simple: an asset depreciates with time, at least for tax purposes, at a regular rate.  This means that in the eyes of the tax department, your earned income from an asset like a property can be offset by this ‘loss’ or ‘depreciation’ over time.  This works by lowering the amount of income from the property which is taxable, and means you are getting a far greater return on the initial investment.  By correctly claiming depreciation, properties become closer to the ideal goal of being “cash flow positive,” the holy grail of investment properties.

Is your property eligible for depreciation?  The rule of thumb is that assessable income earned on a residential or commercial investment property makes it eligible for depreciation.  There are two main categories to consider, ‘plant and equipment’ and ‘capital works.’  ‘Plant and equipment’ covers any furniture or fittings the property has been outfitted with by the tax-paying investor.  ‘Capital works’ include overall changes to the structure such as renovations.  Can it be removed from the property without compromising the structural integrity (i.e. a clock on the wall)?  If it can be removed, it falls under ‘plant and equipment,’ nearly everything else falls under ‘capital works.’

To learn more about a potential investment property before buying, it is possible to commission companies to compile a property depreciation report, or depreciation schedule.  This will detail all tax depreciation and write-off claims over the life of the investment property.  Nearly all properties, even old properties, depreciate, and even demolition projects are full of write-offs, so it’s always an intelligent investment move to find out what you could be deducting from your taxes before even lifting a hammer to an investment property project.

Sharon Freeman is a freelance author who writes about Real Estate and Property tips for her local Sydney market.

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Category: Housing

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