Two-thirds of property investors might be paying too much tax

Key issue for brokers looking to maximise their client's investment potential

Two-thirds of property investors might be paying too much tax


By Mike Wood

Property investors might be overpaying massively on their tax as a result of failing to claim against depreciating assets.

BMT Tax Depreciation looked into 100,000 investment properties in Australia and found that 66% had undergone renovation work in the last three years.

Changes in legislation since 2017 had led many to think that they were no longer able to claim against depreciated assets and had thus failed to do so, leaving thousands of dollars on the table.

“After 23 years that I’ve been doing tax depreciation schedules for property investors, and trying to maximise those deductions for them, I’ve seen some changes,” said CEO of BMT, Bradley Beer.

“They changed legislation in 2017 that means that some of the claims weren’t as high as they used to be on second hand properties – everyone thought it was over, but in fact, you just changed what you claimed.”

“We looked at properties since then, and in the last 3 years on those over 100,000 properties that we’ve done inspections on, two-thirds of them have had some sort of renovation, either before they were bought or afterwards that meant that there was substantially more depreciation available than if we’d just looked at the original costs.”

This sort of tax claim could be particularly important for those who buy investment properties sight unseen and then immediately choose to renovate them.

“Lots of people are buying property sign unseen – I’ve done it myself,” said Beer. “In the last couple of years of interesting times, people have bought more that they haven’t seen, and when they get in, they get a look at it and see things that they can do.”

How much tax do property investors pay?

“Investors are buying their properties with the purpose of making money from them, either from capital growth over time or rental income. The way to achieve both of those things is often via manufacturing capital growth through renovation or otherwise to increase the value of the property.”

“It also means that there are a few sums to be done. If I spend $20,000 or $50,000 on this property, how much extra rent can I get? What is the return on the investment in renovation on additional rental yield?”

“Often, it works out that, without that much money spent, you can increase the rent quite easily – especially by sprucing up a bathroom or kitchen.”

“After that, there’s the tax perspective. After you spend the dollars, it can look like a lot has been put in, but if the rent increases, the depreciation can be a little bonus at the end. The after-tax cost can be negated or reduced.”

“Even things like the scrapping of items when you renovate can still see them have claimable value from a depreciation perspective that can be instant deductions.”

“Brokers, when they are arranging loans for investors, have all these things to think about and they can increase the return, increase serviceability and increase their client’s ability to buy the next one.”

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