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

husband and wife property Co ownershipprop­erty 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.

Own­er­ship ratio

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

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:

Deduc­tion assessment
Without 50:50 split With 50:50 split
Year 1 $5,547 $6,039
Year 2 $4,628 $4,671
Year 3 $3,763 $4,600
Year 4 $2,871 $3,211
Year 5 $2,213 $2,600
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 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.

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