This transcript was generated automatically and may contain small errors.
This episode of the Property Nerds podcast, we've got Tuan Dong from Duo Tax Quantity Surveyors. Now, if you're wondering what a quantity surveyor is, we're going to unpack it in this episode and show you the importance of depreciation and how you can actually increase the claims on your investment property to improve your cash flow. It's a mistake that many people make in terms of forgetting about this critical part of property investment so they can actually better hold their properties. Remember, when it comes to property investment, holding your properties for the long term is what truly unlocks capital growth and compounding wealth generation. That won't happen though if you don't have the cash flow to stay afloat and hold things the whole way through.
So Tuan will unpack more on this from residential property, commercial property, and even some of the mistakes many people make when it comes to actually claiming depreciation on their property. So let's get into it. Nerd alert! Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Tuan, welcome to the Property Nerds show, mate.
Thank you for having us, Arjun. It's a pleasure. Mate, it's been seven years since I've known you. You've played a tremendous part in our journey in InvestorKit, where we see people's cash flow positions, technically lives change during this higher interest rate environment because to be able to make sure people can hold portfolios is probably the most important thing to scaling a portfolio, compounding wealth as you know it. But they do it through this thing called depreciation.
And your team at Duo Tax helps them in terms of getting the right claims on their properties. But for those who are unaware of what depreciation is and how it works, could you give us your 30-second view of what depreciation is and how it works for property investing? Yeah, sure. Thanks, Arjun. And depreciation is essentially the wear and tear on the building and the fixtures and fittings.
So anything like oven, range hood, cooktop, air conditioners, carpet, they're all depreciable and they're called fixtures and fittings or plant and equipment. Now, the wear and tear on that, we can put a dollar value on that. And the job of a quantity surveyor is to work out the depreciation value. And depreciation then is claimed as a tax deduction. But the great thing about it is it's a non-cash deduction, right?
So you don't actually have to fork out money to pay down this building in order to claim it. That's why it's a non-cash deduction and it's like free cash flow for the property and it's helping you boost that cash flow over the life of the property. And hence, it's a great negative gearing tool and helping property investors get ahead. Now, I love how you said it's a tool. And I think that's key, right?
Because when it comes to property investing, people need to also make sure they think of depreciation as a way to support their journey, not the journey. There is different types of depreciation too. Residential, commercial, there are different types of property. How does depreciation differ between the two types of property? Prior to the 2017 legislation, so 9th of May 2017, legislation changed.
And prior to that, all properties were the same. If you bought a property brand new or secondhand, you could claim on plant and equipment or capital works. Capital works being the building, bricks and mortar, slab framework, glazing, doors, they're all capital works. And you'd claim them exactly the same. However, after the legislation changed in 2017, now if you buy a secondhand property in Australia and it's a residential property, you can no longer claim plant and equipment depreciation.
So all those stuff I was talking about that's motorized or carpet, even loose furniture, they're all plant and equipment. You can no longer claim them in a secondhand setting. So if you purchase it as a secondhand or existing property, you can't claim them any longer after that date. However, capital work still remains the same. So the building, you can still claim 2.
5% to 4% depending on the use of the building. Industrial buildings, for example, will have a higher yield of return in terms of claiming depreciation on 4% because of the usage being manufacturing facilities and whatnot. But when it comes to claiming for commercial, you can still claim on secondhand plant and equipment. So that's the biggest difference. That's a substantial claiming difference then when it comes to commercial versus residential, right?
And we're talking thousands of dollars, Arjun. Lots of dollars. Yeah, and I think on that note as well, what people don't recognize is that commercial assets are quite positive cash flow. So you're actually reducing that tax event because of the depreciation being so high on that positive cash flow. It's actually aiding the reduction of it.
Whereas on say residential and it's negative cash flow, the depreciation might be a little bit different. It's increasing the paper negative cash flow to be able to have some more returns back to you, right? So that core difference. With depreciation, one more thing I wanted to cover off was the journey of actually getting your hands on the benefit. Could you quickly give us like a run through of how someone can go from speaking to your team, what does the team do, turnaround time, and then like what is the tangible thing a property investor gets and like just that flow?
Because we're talking about the great benefits and how it can help, but what does that flow look like? Yeah, essentially a depreciation schedule has to be prepared by a quantity surveyor. A quantity surveyor is a construction economist approved by the tax board, which essentially means that you go to someone that's qualified to give you advice around what your building costs. What is your building worth today, whether it's brand new or secondhand? And then using that advice, we will then value.
So first step is, of course, you come into Duotax referred by Arjun, for example, and then your first challenge is, okay, I've got a property. I don't know what it's worth in terms of depreciation or whether it's even worthwhile getting a depreciation schedule because it's going to give me this tax deduction, but what am I paying money for if there's no tax deduction, if it's too old? That's the very common question. So what we do is we get an inquiry from an organization like Arjun's, and then they might say, okay, I've got a property. Here's the address.
I'm about to settle on it. Can you work out if there's any depreciation so we can work out if we need to get an inspection done and proceed to get a report? We take that address. We'll then shop it through RP Data or one of these online services. Now there's so much availability for data in terms of photos, which indicates, okay, have there been any renovations?
How old is the property? How large is the property? What type of build is the property? And then we get an indication, okay, well, this property is going to yield you $10,000 per year in tax deductions for the next two to three years as a minimum. That gives you an indication that I know exactly what I'm going to get back as a tax deduction, and hence my refund might be $3,500 or $4,000 if I'm PAYG, which means that, yes, for $600 for a report, it might be worthwhile.
Let's go ahead, $600 investment, which you pay one time, and then you say, yes, Tuan, we'd love to go ahead. We go out there, inspect the property, survey it, make sure we measure how many downlights, how big is the building, how many windows, how many doors, and then we work out a build cost and then depreciate that, get you a schedule that will last you 40 years from the date that it's built, which means that you'd only organize a report once, and because it's a forecasting report, it gives you a schedule of how much depreciation you get over the life of the building, and that's it. Unless you do another renovation, will you need to get another report done? So that's the value of the negative gearing tool known as the tax depreciation schedule. So when you do a renovation and then you do another depreciation schedule, is there anything that you can't claim?
With a renovation, as long as the renovation is completed with the intent to use for income-producing purposes. So if you renovate a property, improve it, and do an extension, or fit out the garage and turn it into a granny flat, as long as the intent is always to use it for the intent of rent, then you can always claim full depreciation. So even though the property you bought might be secondhand and you bought it in 2025, if you do a depreciation schedule on that today, you would lose all the plant and equipment claims because it's secondhand, but you can still claim the building. However, when you do the renovation on it, it's considered brand new because you now have purchased everything from a brand new retailer, for example, or a builder, then you can claim everything as a depreciating asset, which is considered Division 40 for those wanting to know exactly what that term means for plant and equipment claims. I love how you can remember those division numbers and stuff.
It's like a librarian, you've got these codes and everything all done. So Tuan, on the renovations question Jack mentioned, you might be getting rid of stuff that when you're ripping out a bathroom or a kitchen, but it might not be things that are super old either. What happens in that scenario? Because you're losing previous depreciation stuff that you claimed on. How does that all work?
So essentially because the property might have a cutoff date of 1987, that's the cutoff date for original structure.
