Cheap Depreciation reports (Hidden) costs – $121,586

Cheap Depreciation Reports. Are they a good idea? Hopefully, this article will save another property investor $121,586 in property tax depreciation.

An existing client wanted a review of some existing depreciation reports completed by another “quantity surveyor firm”.

The client placed trust in our service to offer more honest and expert feedback as quantity surveyors, similar to what they had received on previously completed work.

Our response to review work by others is usually willing and reviewed ‘case-by-case’.

Here, it was as simple as, “happy to review your existing depreciation reports (by others) at no charge and if we can improve it, because of omissions or errors–we will.”

Cheap Depreciation reports. Cost [e.g. $63,182 and $58,404, Total $121,586]

The client had paid very little ($200-$300) for the depreciation reports (for our review) by a “depreciation expert” provider.

The first review of the depreciation reports (done by others) established that a quantity surveyor did not complete the reports…

we could tell by the method adopted in arriving at the deductions.

There was no quantity surveyor sign-off, or tax agent details listed anywhere either…

including many other errors and omissions (of which would cost this client, had we not intervened)…

Red flags.

The method used by this other “provider” (top-down approach), in simplistic terms, includes:

purchase price of $’x’, so capital improvements equals $’y’. (i.e. ‘y’ being the part that they depreciated).

Incorrect.

A Quantity Surveyor’s Approach to Depreciation Costings

Quantity surveyors never use the above approach (to arrive at depreciation costs). They ‘build up the cost’ (by measuring, pricing and estimating the components) from ‘first principles’, not by a top-down approach. Hence why the ATO (Australian Tax Office) approves of quantity surveyors as suitably qualified and experienced for tax depreciation work (ATO Tax Ruling: 97/25 Cl. 27. “Unless they are otherwise qualified, property valuers, real estate agents, accountants and solicitors have neither the relevant qualifications nor experience”).

Let’s give a top-down approach (or method of depreciation) and show where the error lies as far as depreciation costing…

In the example, two identical buildings are constructed; at the same time, side by side, on the same sized land plots. They sell two weeks apart at a difference of $50,000. That doesn’t automatically mean the build costs were $50,000 more with $50,000 more in depreciation benefits!

It just means that one sold more for $50,000 more (reasons might include; due to lack of research and negotiation skills??).

After BWK Group’s Help (via our Depreciation Service): 

Having extensive construction industry experience, knowledge of construction costs and a keen eye… 

revisiting the requested reports (for review), upon re-doing and completing the new depreciation reports by and signed off by BWK Group, deductions improved by $63,182 (total $220,615) and $58,40 (total of $221,325) by using principles adopted by a quantity surveyor.

fixing a cheap depreciation report

One of the amended reports by BWK Group fixed ($ 63,182 improvement), is shown above.

BWK Group’s work pleased the client.

Unbeknownst to them, had they continued to use their first depreciation reports (done by others), they would be worse off $63,182 and $58,404, respectively.

Questions, therefore, need to be asked…

How important is it to me (as a property investor) that I spend money where it needs to be and avoid cheap depreciation report mistakes?

Every individual circumstance is different. Understood.

However, often property investors will spend a lot more on their investment property insurances every 2 months (compared to what a depreciation report would cost them).

Insurance premiums, for instance, cost the property investor year in. Year-out. When does one see the benefit of an insurance policy?? Hopefully never and so do insurance companies…

Not saying that property insurance is not important. Just identifying a typical yearly outflow of cash for a property investor.

Depreciation schedules (done well) have a one-off fee to the taxpayer (property investor), can last up to 40 years and the value and return on investment is clear every year, upon the taxpayer’s income tax notice of assessment (see an example summary of deductions in the image below).

We have had clients report $10,000 in tax refunds because of our work on their tax depreciation reports (not saying this is a typical example, but happy for those clients). The known is that the taxpayer (property investor) can expect up to 40 years of significant tax deductions and improved tax returns for the life of their depreciation report.

What should I understand about Cheap Depreciation Reports?

Perhaps place the value of service in direct comparison to what is at risk??

Ask yourself:

How much did I pay for my investment property?

Is what I plan to spend on a service relating to the investment property valued in the same regard?

Having depreciation service options for clients can be helpful (as we do) but terms used in Commercial & Residential Tax Depreciation Report advertising such as:

  • competitive depreciation reports
  • cheap depreciation report
  • affordable tax depreciation schedule 
  • budget tax depreciation report/schedules
  • cheapest tax depreciation report/schedules
  • cheap depreciation schedule etc.

shouldn’t belong in the same sentence as:

  • maximum deductions,
  • maximum depreciation, etc.

We believe that anything ‘relatively cheap’ also has a price to pay too. Unfortunately, as shown above, at a significant cost to the property investor regarding their rental property depreciation reports and the dangers of opting for a cheap depreciation report solution.

Wouldn’t it make sense that the benefits of depreciation are too great to go cheap on??

Cheap’ has ‘costs’ (as do cheap depreciation reports). The right advice can be priceless…

tax depreciation schedules

Hopefully, the above expert advice from a quantity surveyor and information will save another property investor $63,182.

Choose your next ‘Depreciation Schedule Provider’ wisely. i.e. Quantity Surveying firm.

Save yourself the headache and stress.

Whether you own a residential property or commercial property, receive depreciation advice from a quantity surveying firm.

Perhaps BWK Group can assist? Click the link below.