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How does property tax depreciation work for investors?

As the owner of a rental investment property, you are eligible for a number of tax deductions. If you want to maximise your investment return, you should look into claiming depreciation. Unlike other common deductions investors can claim, like repairs and home loan interest, depreciation is a little more complex.

In this article we’ll explain what property depreciation is, what you can claim, how much you can claim, and how depreciation is calculated.

What is property depreciation?

Your building structure and any assets contained within it will inevitably experience wear and tear over the years. This can cause a depreciation in value of the structure, assets and general nature of the property. However, investors can claim this depreciation as a tax deduction.

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What can you claim as property depreciation?

Property depreciation tax deductions fall under two categories:

  1. Division 40 plant and equipment: these kinds of assets can be easily removed from a residential investment property or are mechanical in nature. Examples include solar panels, air conditioning units, and blinds. Under Division 40, investors can claim value depreciation for the wear and tear of assets like these.

  2. Division 43 capital works: this refers to tax deductions property investors can claim for wear and tear of the building’s structure, plus assets that are fixed to the property. Division 43 also includes structural improvements made in renovations, even if done by a previous owner. It covers items such as doors, bath tubs, walls, driveways and fences.

How much can you claim as rental property depreciation?

Plant and equipment

Plant and equipment assets that cost $300 or less can be depreciated and claimed in their first year of usage. Assets over $300 can only be depreciated across their estimated ‘useful life’. The Australian Tax Office (ATO) has a table indicating the estimated useful life of various plant and equipment assets.

You can also hire a quantity surveyor to assess the plant and equipment assets on your property and provide you with a formal depreciation schedule. A tax depreciation schedule is a report that details all possible tax depreciation deductions. Owners can make their own effective life asset estimations and depreciations, so long as they are able to justify their calculations.

Capital works

So long as your rental property was built after 15 September 1987 you can make capital works deductions. Deductions are able to be claimed over a 40 year period at 2.5% per year. If your property was constructed before 15 September 1987, you may still be able to claim deductions, particularly if the property has been renovated or improved more recently.

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How do you calculate plant and equipment depreciation on an investment property?

Property depreciation isn’t the easiest claim to calculate, so many investors will use the services of a quantity surveyor instead of trying to do it themselves. Please note that doing a DIY tax depreciation schedule or getting a cheap report done can mean missing out on thousands of dollars of deductions. It’s worth doing your research to find a high quality depreciation schedule provider.

But if you want to calculate plant and asset depreciation on your investment property, you can try a couple of different methods:

  1. The prime cost method: this method makes the assumption that a depreciating asset will decrease evenly over its life. For example, a $10,000 asset with an estimated useful life of ten years will depreciate at $1,000 per year.

  2. The diminishing value method: this alternative method instead makes the assumption that the depreciating asset’s value will decrease the most in the early years of its useful life.

You can read more about how to make these calculations on the ATO website.

What else should I know about investment property depreciation?

1. Keep records

As with all tax related matters, your ability to claim deductions increases if you can provide records proving your claims. Remember to keep the following records for capital works assets and projects:

  • Construction costs involved
  • Construction work details
  • Dates that work commenced and was completed

If purchasing a second-hand property, it’s good to get this information from the previous owners. Keep a hold of receipts and records for plant and equipment assets too, even after lodging your tax return.

2. Depreciation expenses you can’t claim

As of 1 July 2017, claiming depreciation on investment property second-hand assets (e.g. a second-hand air conditioner) is no longer allowed, unless you run an investment property business. This also applies to any assets you purchase during the time you live in your rental property, if applicable.

It’s a good idea to wait until your property is rented or available for rent before you purchase assets, and make sure they are new. If the second-hand assets were purchased and installed before 9 May 2017, depreciation can still be claimed for the rest of the asset’s useful life.

3. You can still get depreciation deductions on older properties

While you generally may not be able to claim depreciation on properties purchased before 15 September 1987, you can usually still find deductions for plant and equipment asset depreciation. Plus, more recent renovations and improvements can be considered for depreciation claims. It’s smart to get a quantity surveyor to inspect your property and assist you with this step.

4. Back-claiming is possible

Have you only recently learned about tax depreciation deductions? Depending on your tax lodgements from previous years, you can usually claim depreciation deductions dating back several years. An accountant can advise you on this based on your personal circumstances.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, new purchase, lender, investing, investment, investment property, depreciation

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