Claiming Investment Property Depreciation
Every investment property will experience wear and tear through the years – and it comes at a significant cost for the owner. Fortunately, claiming investment property depreciation as a legal tax deduction could offset property upkeep expenses.
Here’s a guideline on how to claim investment property depreciation, what types of depreciation are eligible, and how property owners can maximise tax deductions.
What is property depreciation?
The Australian Taxation Office (ATO) defines depreciation as the fall in the value of an asset over time because of the structure’s general wear and tear.
Depreciation in the context of investment properties allows owners to claim tax deductions based on the declining value of certain assets within the investment property.
For example, you can claim taxable income on certain elements, such as built-in appliances, fixed assets like kitchen fittings, and the structure of the building.
The key to depreciation is that you can only claim it if you earn income from a property. In short, you cannot claim depreciation on your owner-occupier home as you aren’t earning income from that property.
What can you claim on depreciation?
There are two categories of depreciation. Let’s discuss each one.
Capital Works Depreciation
Also known as building depreciation, capital works pertain to the property’s structural elements, including the walls, roofs, floors, and fixed assets such as kitchen and bathroom fittings.
Capital works depreciation is claimed over a period of 25 to a maximum of 40 years, depending on the property’s construction commencement date. The rate is usually 2.5% from the time the property is built, with a focus on the construction costs.
It sounds like such a small incentive for a hassle, but it adds up in the long run. For instance, if you bought a house today at $600,000, and the house was valued at $300,000, you may claim around $6,000 against the property’s rental income, or based on the quantity surveyor’s figures.
Plant and Equipment Depreciation
This category covers the removable assets and fixtures within the property, such as carpets, blinds, air conditioning units, appliances, and furniture. Plant and equipment depreciation can be claimed over their respective lifespan, ranging from a few years to a decade. These are depreciating assets that have a limited lifespan.
Examples include:
- Appliances
- Carpet
- Furniture
- Air Conditioning
- Floating timber floorboards
To know about plant and equipment depreciation claims, say you purchase a $700,000 home. The rental income is about $2,500 per month. You may claim around $35,000 in the first year of owning the property.
But, you’ve had to install a new heating system during the year. Based on the surveyor’s estimate, you can claim a further $1,000 yearly for its effective life. You could then claim an additional tax deduction (to add if you’re negatively geared in terms of income).
What cannot be claimed as depreciation?
Depreciation claims only include capital works and plant and equipment assets.
Investors cannot claim tax deductions on these expenses:
- Stamp duty;
- Cost of traveling to inspect the property;
- Repairs and maintenance are done before renting the property out;
- Expenses incurred when selling the property;
- Expenses during private use of the property.
How to calculate investment property depreciation?
Engaging a qualified quantity surveyor or a registered tax agent means they can prepare something called a depreciation schedule.
A depreciation schedule outlines a detailed breakdown of depreciable assets, their effective lifespan, and the allowable deductions available on your investment property.
The schedule can be furnished as soon as possible after your settlement date, as this document is valid for the property’s lifetime, or if you own it. A depreciation schedule can only be documented by a surveyor with the ATO’s qualifications, not an accountant, real estate agent, or solicitor.
Depending on the company you use, paying for a depreciation schedule will cost around $400 to $700. Check with your developer if you buy a new property – they may include it for free or negotiate a lower fee.
Conclusion
Investment property depreciation is a valuable tool that can enhance the financial returns of property investors in Australia. By understanding and leveraging the benefits of depreciation, you can optimize tax deductions and improve cash flow.
Let us assist you in seeking expert advice to ensure compliance and take full advantage of the depreciation claims available to them.
