Investment Property Tax Deductions: Capital Works
Discussing one of the greatest property investment tax benefits - Capital Works. What is it and how much can you claim at tax time?
One of the greatest things about real estate investment in Australia are the tax benefits. Because we’re amid tax season, we thought it’d be fitting to explain Capital Works. If you’re an investor and are yet to lodge your tax return, see how you can make the most of this property investment tax benefit.
Capital works is one of the investment property tax deductions that you can claim as a landlord. It’s applicable to both residential and commercial rental properties properties. The Australian Taxation Office (ATO) also refers to Capital Works as Division 43.
Investors can only claim Capital Works against the building (not the land) of their rental. It’s used to cover the wear and tear of structural components of a property and items permanently fixed to it.
The property investment tax benefits that come from claiming this benefit can be quite significant. This deduction can cover the following items:
Sinks, basins, baths, and toilets
Fences and retaining walls
Doors, handles, and locks
Built in cupboards
Bricks, mortar, walls, flooring, and wiring
As per the ATO website, Capital Works can also be claimed in your investment property tax deductions for structural improvements, within relevant dates. Such examples include:
Altercations or improvements are added to your property
Earthworks are undertaken for environmental protection which impedes on your investment property
Structural improvements are undertaken on the property
Guide to calculating Capital Works as an investment property tax deduction
The rate of which you can claim Capital Works differs for residential and commercial properties. It also differs depending on when it was built or when improvements took place. If your residential investment property was built after the 15th of September 1987, you can claim this benefit at 2.5% per annum over the course of 40 years (from the date it was completed).
Further to this, you can only claim against what the cost was to build the property at the time. Thus, this does not include the price paid for the land. Please refer to the example shown below to understand how Capital Works is calculated on a residential investment property.
James entered the Australian property market in 2021 and bought a home for $500,000. He rented it out straight away. The property was built a year prior, in 2020, and a report obtained by a Quantity Surveyor estimated the total construction to be $350,000.
To determine the Capital Works that James can claim as a property investment tax benefit, in his most recent tax return, please refer to the figure below:
$350,000 X 2.5% = $8,750
Capital Works versus Plant and Equipment
As explained, the ATO also refers to Capital Works as Division 43. The property investment tax benefits from Capital Works only cover permanently fixed items on an investment property.
Plant and Equipment is also known as Division 40 with the ATO. Plant and Equipment investment property tax deductions are only applicable to the easily removable fixtures and fittings around an investment property (i.e., carpets and air conditioning units).
Speaking to property investment advisers to make the most of investment property tax deductions
When looking into real estate investment in Australia it’s always recommended that you consult property investment advisers. These are a team of professionals who’re experts on the Australian property market and can help you to understand how to make the most of property investment tax benefits.
At REIF we deal with new house and land packages. These packages allow our clients to make the most of Capital Works. Instead of purchasing an investment property that was built in 2002 and only being able to claim this deduction for another 20 years, a new property allows them to recoup the costs over 40 years. Not to mention, a new property generally comes with less structural and maintenance issues.
The various property investment advisers who’ll be important in recouping your property investment tax benefits include:
Property Specialists – to help you purchase the investment property and understand how it’ll help you build long term, sustainable wealth
Tax Accountants – to lodge your tax returns and allow you to understand what you can claim
Quantity Surveyors – to survey the depreciable items that you can claim in your end of year tax return
For more information
As always, for more information about real estate investment in Australia and the great opportunities available, please click the button below to book your complimentary 60-minute investment consultation with out team. Always happy to help!