From: Steve McKnight
Hi,
I have been reading with some interest the odd post from time to time about quantity surveyors.
I thought I'd add some flesh to the discussion by outlining the role and use of a quantity surveyor and also distinguish between the two types of allowable depreciation.
About Quantity Surveyors
------------------------
A quantity surveyor is a consultant who specializes is going through a building and inspecting it from the perspective of valuing the building and contents of a property after it is constructed.
Based on the assessed value, the investor can then use the quantity surveyor's report as the basis for claiming depreciation and capital works tax deductions.
Depreciation tax deductions
---------------------------
You can generally claim a tax deduction for depreciation associated with the fixtures and fittings in a rental property.
This usually relates to furniture, carpet, light fittings etc.
Depreciation is a non-cash accounting expense. It exists to try and match income with the cost associated with generating that income regardless of what cash is physically paid.
For example, imagine you earn cash rent but pay no repair bills during the year.
Accountants will try to match the rental income with physical general wear and tear of the building even though you didn't pay any repair bills during the year.
The amount of wear and tear on furniture and fittings allowed by the tax department is currently 13.33% per annum on a reducing or diminishing balance basis.
Capital Works
-------------
In limited cases you may also claim a tax deduction for capital works associated with the construction and improvement of income producing buildings.
The rules in this area are complex, but let's just say that you may claim between 2.5% and 4% of the cost of the building / structural improvement on a straight-line basis.
For example, buying a property with a structural cost of $100,000 and constructed seven years ago would give rise to a maximum capital works deduction of $2,500 per annum.
About depreciation benefits
---------------------------
Depreciation benefits are attractive to some property investors because they can reduce or perhaps eliminate your tax bill.
But they can be double edged sword.
If you make an allowance for future expenditure but don't actually spend the money, then in the long-term your property will suffer and the quality of the tenant you attract might be compromised.
Personally I don't factor too much into depreciation benefits and I keep them outside of my investing decision.
I believe that the deal must stack up regardless of depreciation benefits because once the benefits expire then the cashflow must stand alone.
Also, my accounting background tells me that it is a false economy to depreciate an appreciating asset like property.
Sure, you save tax today to pay more tax tomorrow, if you sell.
Back to surveyors
-----------------
The job of a quantity surveyor is to walk through a second-hand building and provide a figure that you can reasonably claim for depreciation and capital works.
The surveyor is paid for his/her report, which means that before you engage a quantity surveyor you need to ensure that the after tax cash benefit you'll receive is worth the cost.
As a rule of thumb, any unrenovated house older than say eight years will have little depreciation benefit and any structurally unimproved property older than twenty years will have little capital works available.
Bottom line
-----------
Remember that when you buy a property there are three components to the value:
1. The land value
2. The building value
3. The fixtures and fittings value
In real estate you can say that the building and contents depreciate and the land appreciates in value.
A quantity surveyor can determine a value for the building, which can be written off as capital works and also the fixtures and fittings, which can be depreciated.
But remember that you should always be investing to make money rather than save tax.
I hope you have enjoyed this article.
Steve McKnight
www.propertyinvesting.com
Hi,
I have been reading with some interest the odd post from time to time about quantity surveyors.
I thought I'd add some flesh to the discussion by outlining the role and use of a quantity surveyor and also distinguish between the two types of allowable depreciation.
About Quantity Surveyors
------------------------
A quantity surveyor is a consultant who specializes is going through a building and inspecting it from the perspective of valuing the building and contents of a property after it is constructed.
Based on the assessed value, the investor can then use the quantity surveyor's report as the basis for claiming depreciation and capital works tax deductions.
Depreciation tax deductions
---------------------------
You can generally claim a tax deduction for depreciation associated with the fixtures and fittings in a rental property.
This usually relates to furniture, carpet, light fittings etc.
Depreciation is a non-cash accounting expense. It exists to try and match income with the cost associated with generating that income regardless of what cash is physically paid.
For example, imagine you earn cash rent but pay no repair bills during the year.
Accountants will try to match the rental income with physical general wear and tear of the building even though you didn't pay any repair bills during the year.
The amount of wear and tear on furniture and fittings allowed by the tax department is currently 13.33% per annum on a reducing or diminishing balance basis.
Capital Works
-------------
In limited cases you may also claim a tax deduction for capital works associated with the construction and improvement of income producing buildings.
The rules in this area are complex, but let's just say that you may claim between 2.5% and 4% of the cost of the building / structural improvement on a straight-line basis.
For example, buying a property with a structural cost of $100,000 and constructed seven years ago would give rise to a maximum capital works deduction of $2,500 per annum.
About depreciation benefits
---------------------------
Depreciation benefits are attractive to some property investors because they can reduce or perhaps eliminate your tax bill.
But they can be double edged sword.
If you make an allowance for future expenditure but don't actually spend the money, then in the long-term your property will suffer and the quality of the tenant you attract might be compromised.
Personally I don't factor too much into depreciation benefits and I keep them outside of my investing decision.
I believe that the deal must stack up regardless of depreciation benefits because once the benefits expire then the cashflow must stand alone.
Also, my accounting background tells me that it is a false economy to depreciate an appreciating asset like property.
Sure, you save tax today to pay more tax tomorrow, if you sell.
Back to surveyors
-----------------
The job of a quantity surveyor is to walk through a second-hand building and provide a figure that you can reasonably claim for depreciation and capital works.
The surveyor is paid for his/her report, which means that before you engage a quantity surveyor you need to ensure that the after tax cash benefit you'll receive is worth the cost.
As a rule of thumb, any unrenovated house older than say eight years will have little depreciation benefit and any structurally unimproved property older than twenty years will have little capital works available.
Bottom line
-----------
Remember that when you buy a property there are three components to the value:
1. The land value
2. The building value
3. The fixtures and fittings value
In real estate you can say that the building and contents depreciate and the land appreciates in value.
A quantity surveyor can determine a value for the building, which can be written off as capital works and also the fixtures and fittings, which can be depreciated.
But remember that you should always be investing to make money rather than save tax.
I hope you have enjoyed this article.
Steve McKnight
www.propertyinvesting.com
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