Depreciation is often missed and not claimed by many property investors. it is easy to overlook the many and often significant deductions available in depreciation. There are many tax and cash-flow benefits to claiming depreciation.
What is rental property depreciation?
In Australia an investment property owner is able to claim deductions for the decline in value of a building’s structure and the assets within it. This depreciation for residential rental properties is able to be claimed as a tax deduction.
Depreciation can be claimed under two categories:
- Capital works and
- Plant and equipment assets
What are plant and equipment assets?
Rental property removable fixtures and fittings are referred to as “Plant and equipment” assets. For example:
- Hot water systems
Each of these items depreciation is calculated, based on an effective life span as set by the ATO (normally between 5-10 years). As a property investor it is important to take the time to learn what you can and cannot claim depreciation deductions. This can help you avoid paying too much tax.
Note: Plant and equipment assets were affected by the 2017 legislation amendments.
What are capital works deductions?
Capital works deductions are claims for general wear and tear to the structure of the rental property. This includes fixed items for example:
If you own a residential rental property that commenced construction after 15/09/1987 you may be eligible to claim capital works deductions. These deductions are claimed over a period of 40 years. Renovations on a residential property that occurred after 15/09/1987 may also be eligible for capital works deductions.
There is some effort required to assess and claim capital works deductions. But let’s say you bought a rental property for $600k and it had a building cost of $400k, you could be claiming up to 10k/yr in deductions. Certainly worth the effort.
How to claim depreciation on a rental property?
The easiest and best way to claim depreciation on your rental property is to get a tax depreciation schedule prepared for the property. Simply arrange a qualified quantity surveyor to inspect the rental property and provide a report to your accountant.
If your residential property was built after 1985, a qualified Quantity Surveyor is the only person who can estimate the construction costs, if these costs are unknown.
What is a depreciation schedule?
Normally you will employ a quantity surveyor to complete a depreciation schedule for you. This is a list of the depreciation allowances that you are entitled to claim. Your depreciation schedule will include a list of the depreciable items and a schedule showing their decline in value over time (up to 40 years).
There are two methods of calculating depreciation
- Diminishing Value Method – Reduces by a specified percentage each year.
- Prime Cost Method – A static percentage of the items original value or cost.
The Hidden Catch
The only drawback is that when you sell the property, you will need to reduce your cost base (increasing your capital gain) by the amount of building depreciation you have claimed. Speak with your accountant for specific advice for your situation.