Understanding Property Depreciation for Investors in Australia

Property depreciation is a powerful yet often underutilized tool for property investors in Australia. It allows you to claim tax deductions on the natural wear and tear of your investment property over time. By understanding how it works and what can be claimed, you can significantly enhance your cash flow and maximize returns.

Here’s everything you need to know about property depreciation and how to make the most of it.

What is Property Depreciation?

Property depreciation refers to the decline in the value of specific assets within an investment property, including the building itself and its fittings. As an investor, you can claim this decline in value as a tax deduction over time, helping to offset your rental income.

The Two Types of Depreciation

1. Capital Works Deductions (Division 43)
   • Covers the building’s structure (e.g., walls, roof, floors) and fixed assets like plumbing and electrical systems.
   • Available for properties built after July 1, 1985, with a claim rate of 2.5% annually over 40 years.
2. Plant and Equipment Depreciation (Division 40)
   • Applies to removable items like carpets, blinds, and appliances (e.g., dishwashers and air conditioners).
   • Only applicable to items purchased new by the current owner after May 9, 2017.

Why is Depreciation Important?

Claiming property depreciation offers several benefits, including:

• Lower Taxable Income: Depreciation reduces the income you’re taxed on, which means paying less tax.
• Improved Cash Flow: With lower tax liabilities, you keep more of your rental income.
• No Out-of-Pocket Costs: Depreciation is a non-cash deduction, so you don’t need to spend money to claim it.

What Can You Claim?

As an investor, you can claim depreciation on:

1. Building Costs: This includes construction costs such as materials, labour, and other expenses related to building the property.
2. Fixtures and Fittings: Items like ovens, carpets, and air conditioning units.
3. Renovations: Renovations completed by you or previous owners, provided they fall within eligible timeframes.

How to Maximize Your Depreciation Claims

1. Get a Tax Depreciation Schedule
   • Hire a qualified quantity surveyor to prepare a depreciation schedule. This document outlines all the depreciation deductions you can claim, ensuring compliance with Australian Tax Office (ATO) guidelines.
2. Include Renovations
   • Don’t forget to claim depreciation on renovations, even if they were done by previous owners. Ensure you have proper documentation.
3. Claim for Older Properties
   • While newer properties typically offer more depreciation benefits, older properties may still have claimable deductions, especially if they’ve been renovated.
4. Immediate Deductions for Small Assets
   • Assets costing less than $300 can often be claimed as an immediate deduction in the year of purchase.
5. Update Your Schedule Regularly
   • If you purchase new assets or make improvements, update your depreciation schedule to maximize your claims.

Common Myths About Depreciation

• “Depreciation is Only for New Properties.”
  Not true. Older properties can still offer significant depreciation benefits, particularly for renovations and plant equipment.
• “You Can’t Claim if the Property Isn’t Rented.”
  You can claim depreciation for periods when the property was available for rent, even if it wasn’t tenanted.
• “You Must Spend Money to Claim Depreciation.”
  Depreciation is a non-cash deduction, so you don’t need to spend money to benefit from it.

A Real-Life Example

Let’s say you own an investment property built in 2015.

• Capital Works Deduction: The building’s construction cost is $200,000. At a rate of 2.5% annually, you can claim $5,000 per year.
• Plant and Equipment Depreciation: Fixtures and fittings worth $20,000 can be depreciated over several years.

In the first year, you could reduce your taxable income by approximately $6,000, potentially saving thousands in tax.

How Depreciation Compares Across Property Types

Final Thoughts

Property depreciation is a valuable tool that can improve your property’s profitability by reducing taxable income and increasing cash flow. Whether your property is new or old, engaging a qualified quantity surveyor to create a detailed depreciation schedule is essential to ensure you’re claiming everything you’re entitled to.

If you’re looking to maximize your returns and boost your property investment strategy, understanding depreciation is a step in the right direction.

Need help with your property investment journey? Contact a property expert today to discover how depreciation can benefit you!