Owning an Investment Property

The Australian Taxation Office or (ATO) allows the property investors to claim a deduction related to the building plant and equipment items contained within it. It can be claimed by any owner of an income producing property. This deduction essentially reduces the after tax cost of owning an investment property which means investors pay less tax using your investment property calculator Melbourne.

The Lenders' Criteria

Lenders uses different qualification criteria to determine if a mortgage is warranted and how much they'll loan against a property. Investor owners usually aren't individually evaluated as to their credit history because it's not as important to the lender as the income generating potential of the property to be mortgaged.

The Rental Income

When the motivation for the purchase is income, the lender wants to evaluate the property based mostly on the income it will generate. Of course, property condition and other factors enter into mortgage qualification as well, but income is the biggest factor. A mortgage is likely to be initiated if the property can service the debt and meet the mortgage payments and still have an acceptable monthly income cash flow. 

The Expenses Factor

Marketing and advertising expenses can vary a great deal depending on the property type. Most of this expense for an apartment property would be advertising to generate tenant applicants. The same would apply to a retail or office property, but there might also be marketing expenses to present the property to consumers or clients for the tenants. Professional management is the norm for larger commercial properties, and this expense can be significant. It can be offset somewhat, by the savings that professional management can generate in the operation and maintenance of the property. Utilities should be included when they're not passed along to tenants. Everything from landscaping to fixing broken air conditioning units or painting of units should be included in repairs and maintenance. Do not forget the insurance which is a major expense as well. Other expenses can depend on the use of the property and the tenants. Missing expenses will increase net operating income and your client will overpay for the property based on valuation using cap rate. It's critical to capture all the operating expenses of the property. 

There are other costs you'll have to pay in which using the investment property calculator, but are not necessarily limited to:

·         Property taxes

·         Insurance

·         Maintenance

·         HOA dues

·         Management expenses, if you plan to hire a property manager

·         Utilities

Calculating Property Depreciation Using an Example:

Apply the investment property calculator using a $300,000 single-family home purchase.

1. Separate your land and building values, which you can also get from a tax assessment. Here, land value is $100,000 and building value is $200,000.
2. Divide your building value by 27.5, which is the number of years IRS has prescribed as the useful life of a residential property. This is your annual depreciation of your residential investment property.
3. Multiply this annual depreciation by your marginal tax rate.

Property depreciation is a critical tax deduction for real estate investors and should not be overlooked. It is important for the real estate investor to understand the basics of depreciation. This will assist the investor with tax planning and help them understand after-tax investment returns.

Components of Depreciation Schedule

An important thing to understand about depreciation schedule Melbourne is that the amount you write off is not dependent on how much money you put down to purchase the property. It is important to know that depreciation is not a choice and if you are eligible to take it, you must take the tax write off. If your rental is eligible for depreciation but you choose not to take it or forget to take it.

Depreciation schedule has two components:

• Capital works deductions
• Plant and Equipment depreciation

Capital works deductions

Capital works deductions are income tax deductions that can be claimed for expenses such as:

• building construction costs
• the cost of altering a building
• the cost of capital improvements to the surrounding property such as, external improvements (fence, driveways, retaining walls and others).

Capital works costs are deducted over 40 years.

Plant and Equipment depreciation

Plant and Equipment items for residential and commercial properties are items that can be easily removed including (but not limited to) carpets, hot water systems and air-conditioners, as opposed to items that are permanently fixed to the structure of the building. Plant items include mechanically or electronically operated assets, even though they may be fixed to the structure of the building. These items are affected by the 2017 changes. These changes have been passed in parliament and fall under the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017. For residential property investors, Plant and Equipment depreciation deductions will be limited the following:

For properties purchased post 9 May 2017, you are able to claim Plant and Equipment depreciation if:

• the property you purchased is new and you have not lived in it;
• if you have purchased Plant and Equipment items to be installed in the property and you have not used them for personal use; or
• a company owns the property.

For properties purchased pre 9 May 2017, you are able to claim Plant and Equipment depreciation if:

• the property you purchased was used as a rental property some time during the 2016/2017 financial year;
• if you have purchased Plant and Equipment items to be installed in the property and you have not used them for personal use; or
• a company owns the property.

Commercial, industrial and rural properties are not affected by the 2017 changes to property depreciation.

Rural property owners can depreciate items including, buildings, sheds, yards, silos, horticultural plants etc. Fencing, water infrastructure and fodder storages are no longer claimable for properties purchased after 12 May 2015. Properties purchased prior to this date can still make these claims.

A depreciation schedule involves:

·         A full inspection of your property to identify all depreciable items

·         An historical construction cost estimate of the capital works allowances building and structural improvements

·         Valuation of all Plant and Equipment items

·         Preparation of a report which is accepted by the ATO and summarizes the depreciation allowances for the future years

A depreciation schedule Melbourne is an essential tool for all residential property investors, commercial property owners and rural producers looking to maximize the benefits of owning an income generating property. If you don’t have one, you could be missing out on thousands of dollars each year in allowable depreciation.