Property management experts Propertyscouts says with the new tax deductibility laws coming into effect last year, and high tax rates, investment property owners should be taking any opportunity to shrink the taxable income from their rental property.
If the carpets in the renal have started to wear out and the washing machine is dated, the drop in value of these items – known as depreciation - can be claimed as expenses if they have been valued.
Propertyscouts managing director Ryan Weir says there are four key reasons to get a chattels valuation for a rental property.
1. Reduce the amount of taxable income on your rental property
As IRD allows chattels depreciation to be considered as an expense, the amount of taxable income will be reduced accordingly by the amount of annual depreciation. It’s important to note, however, that depreciation can only be claimed if a chattels valuation has been completed. Whilst chattels valuations require a small upfront cost, ultimately, the long-term pay-off is worth it. By investing in a chattels valuation, investment property owners can achieve their dream of pocketing more income (whilst paying much less in taxes).
2. Offset the expense of mortgage interest rates
With mortgage rates running high, property investors are paying significantly more to service their mortgages. Adding to this burden, the new interest deductibility laws mean most owners will start paying more tax on their investment properties
Under the new tax deductibility laws, for most properties purchased on or after the 27 March 2021, mortgage interest rates are no longer a tax-deductible expense (unless the property is a new build or rented out under social housing), resulting in an increase in taxable profit. Chattel depreciation will help to offset the newly acquired taxable profit.
3. Benefits of a chattels valuation for “new builds”
Although the new interest deductibility laws do not apply to new builds, the potential rewards of a chattel valuation can be higher for new builds than for pre-existing dwellings. The value of new chattels is higher than those of second-hand ones, so depreciation is higher in early ownership.
4. The benefits of a chattels valuation will always outweigh the costs
The best way to illustrate this point is by using an example. A property has chattels worth $40,000. One day, these chattels will be worthless. If chattels are not depreciated as an expense, the property owner will have to absorb this as a $40,000 cost. However, if chattels are depreciated, there is a potential saving of $13,200 (calculated @ tax 33%). Professional chattel valuers only charge somewhere between $450-$475 +GST for an apartment or single family home and $725 for a two-unit multi property.
Evidently, the cash-in-hand benefits of obtaining a chattel valuation far outweigh the cost of obtaining one.
Please note, if the chattels on a property are already coming to the end of their useful life, there may not be a significant benefit to obtaining a chattel valuation.
There are a number of people who can value rental property chattels. However, landlords should carefully consider who to employ to undertake the valuation, says Weir.
“A specialist chattel valuer will value chattels higher than a registered valuer. Chattel valuers typically take a wider view of what they consider as a chattel and may include things that are not typically considered chattels (such as the driveway and paths that lead to the property).”
He says in the context of new builds, developers are likely to underquote the value of the chattels. They often get bulk discounts on their chattels and quote based on that, rather than the market value.
“If landlords want to maximise the retained earnings from their rental property, the best option is to partner with an expert chattel valuation company. It will ensure everything IRD considers to be a chattel is covered in the valuation, which in turn will maximise the amount depreciable, minimise the taxable income, and ultimately ensure landlords are retaining as much of their rental property income as possible.”
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