How To Increase Depreciation Deductions for Co-ownership Property
Over half of the depreciation schedules created are for properties that have been purchased by more than one owner.
Last year, just over half of the depreciation schedules completed by BMT Tax Depreciation for investors, were for properties that had been purchased by more than one owner.
It’s not surprising that property co-ownership is becoming popular in and around Seven Hills. It can open doors for investors by increasing buying power and can reduce the burden of purchasing costs and ongoing expenses like rates, repairs and maintenance.
As investors increasingly choose to purchase investment properties with the help of a spouse, friend, family member or another investor, it’s important they understand the advantages this can create when claiming a deduction for depreciation, particularly in the lead-up to the end of financial year.
Ownership structures influence how depreciation deductions are calculated. Co-owning an investment property can create a complex tax situation, however, with the right advice, co-owning can work in your favour.
Co-ownership and Depreciation
A depreciation deduction is available on each asset within a rental
property and to each owner. Commonly, the depreciation deduction for each asset would be calculated first and a tax depreciation schedule prepared. The total deductions would then be split up based on the percentage of ownership for each owner.
However, depending on the opening value of an asset and the ownership ratio, whether it be 80:20 or 50:50 or any other ownership split proportion, there are benefits available to investors by calculating each owner’s interest in the individual assets first and then applying the depreciation rules to the respective owner’s interest. The assets will qualify for increased depreciation rates and the investors can see higher deductions obtained earlier than the commonly used method.
When applying depreciation legislation to assets within properties which have more than one owner, the cost threshold that qualifies depreciating assets for accelerated depreciation rates can be governed based on each owner’s interest in the asset.
ATO legislation allows property investors to claim an immediate write-off for assets with an opening value of less than $300. In a situation where ownership is split, each owner is able to apply this rule and claim an immediate write-off for items where their interest in the asset is below $300.
Similarly, where an owner’s interest in an asset is less than $1,000, the item will qualify for a low-value pool. By allocating assets to a low-value pool, the rate of depreciation is increased. When there is more than one owner, the value of the asset is distributed based upon the percentage of ownership, which will increase the number of items each owner is able to place in the low-value pool, therefore increasing the rate of depreciation.
Property investors who place assets in the low-value pool are able to claim them at a higher rate of 18.75% in the year of purchase; regardless of how long the property has been owned and rented. From the second year onwards, the remaining balance of the item can be claimed at an increased rate of 37.5%.
In a 50:50 ownership situation, by splitting the owner’s interest in each asset, the owners can claim items up to a total individual value of $600 as an immediate write-off. An asset that is valued or costs less than $2,000 will now qualify for the low-value pool and the owner can take advantage of the increased depreciation rates.
Multiple owners’ example, 80:20 split
The following example highlights how ownership structures affect the way depreciation is calculated. We will assume a property is owned by two parties with an 80:20 split, which means that each depreciating asset has the same ownership ratio. A $1,200 hot water system has an effective life set by the ATO of 12 years, which under a diminishing value method has a rate of depreciation of 16.66%. Commonly, the depreciation deduction would be calculated as normal in the first year, resulting in a total claim of $200 (assuming a full year can be claimed). This would then be split up based on the percentage of ownership, resulting in a $160 claim for the 80% owner and $40 for the 20% owner.
Specialist Quantity Surveyor
Let’s look at the same hot water system, but this time a specialist Quantity Surveyor has provided a depreciation schedule that splits up each owner’s interest in the asset. The investor who owns 20% of the property has an interest of $240 while the other has an interest of $960. By applying depreciation legislation to the owners’ interest in the hot water system, $240 can be claimed immediately and the $960 can be added to the low-value pool, which will allow for a $180 claim, bringing their combined total claim to $420.
In this scenario, the hot water system alone went from a total claim combined of $200 to $420 for both owners in the first year. There is also an added bonus for the owners; when immediate write-off and low-value pooling legislation are used, no pro-rata adjustment will be applied based on how long the investor has owned the property in the first year of claiming depreciation deductions. This is opposed to the depreciation rate which would normally be applied based on the assets effective life.
Multiple owners’ case study, 50:50 split
Let’s assume a husband and wife purchased an investment property with a 50:50 ownership share. This example highlights the difference between not splitting up the opening value of the assets versus splitting the assets’ opening value 50:50 and applying depreciation legislation to each person’s interest in each item.
After listing ten fixtures normally found in a residential property with a total value of $27,462, BMT Tax Depreciation conducted an assessment on the deductions. The results can be seen in the following table:
|Without 50:50 split||With 50:50 split|
|TOTAL DEDUCTIONS (First 5 years)||$19,022||$21,121|
Taking advantage of the co-ownership scenario would create an additional $2,099 in tax deductions for the owners not just in Seven Hills but any where.
A specialist Quantity Surveyor should always take into account the number of owners and ownership percentages, from two owners at 60:40 to 1:99 or even four owners at 70:15:10:5. For owners with lower percentages of ownership, the low-value pool and immediate write-off rules will apply to more assets, increasing deductions earlier.
Property owners who would like a free over-the-phone assessment of the available deductions they can claim should contact BMT Tax Depreciation on 1300 728 726.
About Bradley Beer
Bradley Beer is Managing Director of BMT Tax Depreciation. Brad has over 15 years experience in the property depreciation, building and construction industry. Brad is actively involved in educating property investors and property-related organisations about the importance of tax depreciation.
Brad is a regular keynote speaker and presenter covering property depreciation services on television, radio, at conferences and exhibitions Australia-wide. Some of these include:
* Property Expos — Australia Wide
* National Tax & Accountants Association
* Defence Housing Australia
* Taxation Institute of Australia
* Real Estate Institute Australia
* Regular training events for national corporate real estate groups
* Regular appearances on Foxtel Program Your Money Your Call shown on Sky News Business Channel.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.