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The huge tax deduction that property investors miss

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Thousands of dollars in tax deductions each year are missed by Australian real estate investors who fail to maximise one key part of their tax return.

It’s the second-biggest tax deduction claimed by Australia’s 2.2 million residential property investors, but many miss out on its full financial benefit.

Depreciation ranks only behind interest repayment deductions, according to Australian Taxation Office data, and its boost to investors’ finances can be even more powerful.

Property investor, author and university lecturer Peter Koulizos says depreciation is “an excellent deduction because you don’t have to spend the money in that financial year”.

It really is something for nothing: deducting the decline in value of items including curtains, carpets and appliances, plus receiving a 2.5 per cent annual deduction on the construction cost for houses and units built after 1987.

For an investment property costing $250,000 to build, this construction cost writedown alone can deliver a $6250 annual tax deduction.

However, it’s estimated that up to 80 per cent of investors don’t maximise depreciation deductions.

“Many investors don’t claim as much as they should because they don’t want to spend the money to get a report by a quantity surveyor,” Koulizos says.

A report costs between $250 and $800, but cheaper online versions are basic and may require self-assessment.

“I’m happy to pay the professionals because their job is to keep up to date with what’s happening,” Koulizos says. “You get more than your money back.”

Some quantity surveyors guarantee to get you at least double their fees in deductions.

BMT Tax Depreciation CEO Bradley Beer says customers can contact quantity surveyors with their property details to get an idea of deductions before deciding whether to pay for a report.

“You can back-claim for two years if you have been missing out and can adjust your tax return – don’t lose another year,” he says.

Rule changes in 2017 took some shine off depreciation deductions by banning them for items purchased second-hand, but Beer says there was no change to the 2.5 per cent capital works deduction “that makes up about 85-90 per cent of the deductions you are able to claim”.

“The changes only applied to previously-used plant and equipment, so if it’s new you still get to claim the full deduction,” he said.

The ATO’s latest data shows average property depreciation tax deductions for 2017-18 were $3835, while BMT found its clients’ properties netted $8540 in the same period.

 
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