Tax Return:: Capital Works Deduction for Your Rental Property
Hello, this is your tax and super specialist, P&C Tax Professionals.
As we all know, tax can become tricky at times and if you are an investor in rental properties, you would not want to miss out on any tax deductions you could claim as a result of renting out your property. In this blog post, we will specifically look at the capital works deduction that is available to rental property owners.
<What is capital works deduction?>
Capital works deductions allow an investor to claim tax deductions for the wear and tear that is related to the structure of the property as well as the items that are permanently fixed to the property. This may consist of any structural improvements that may have been done during a renovation of the property.
For residential properties, capital works deductions will be applicable to the following items:
> Bricks and mortar, walls, flooring, and electrical wiring
> Driveways
> Doors and door attachments (such as handles and locks)
> Built-in kitchen cupboards
> Fences and retaining walls
> Laundry lines
> Sinks, basins, baths, showers, and toilet bowls.
<Capital works deductions rate>
The exact percentage rate at which a property depreciates depends on:
> the date the construction commenced
> how the building is used (e.g., is it for residential or commercial purposes?)
Property investors who own residential properties are subject to the following rate depending on when construction commenced on the building:
> After 15 September 1987: Rate of 2.5% per year up to 40 years. Capital works deductions would be claimable each year for up to 40 years starting from the construction commencement date.
> Between 18/07/1985 – 15/09/1987: Rate of 4% per year up to 25 years. Capital works deductions would be claimable each year for up to 25 years starting from the construction commencement date.
<How are capital works deductions calculated>
Let’s go through a simple example of how capital works deductions are calculated for your tax return.
On 1 February 2022, Alice purchased a rental property for a price of $500,000 and immediately rented it out. Alice received a depreciation report from a qualified quantity surveyor outlining the following details:
> Construction of the property began in January 2002.
> Construction of the property was completed in November 2002.
> Estimated cost of constructing the property was $270,000
Alice is only entitled to claim a deduction for the duration of the year her property was producing income (1 February 2022 – 30 June 2022). Since the construction of her residential property began after 15 September 1987, the rate of deduction she is able to claim is 2.5%.
Her capital works deduction that can be included on her 2021-22FY tax return is as follows:
In 2022FY, the property was only used for income producing purposes for 150 days.
Therefore, Alice can claim a capital works deduction of $2,773 for her 2022FY tax return. Since the property was built in 2002, Alice is allowed to continue claiming capital works deductions for her rental property until 2042 as long as she is still owning the property and the property is still generating income.
Prior to lodging your tax return, it is recommended that you obtain a depreciation schedule from a professional quantity surveyor in order to ensure that you make the most out of your capital works tax deduction for your rental property.
For any other enquiries related to tax and/or super, please feel free to contact us through our official Facebook Page (P&C Tax Professionals – Australia) or simply send us an email to pnctax@naver.com.
Thank you and bye for now!
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