Claiming depreciation on investment property

Claiming depreciation on investment property
If you’re a property investor, it’s possible to claim depreciation of your investment property against your income.
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If you’re a property investor, it’s possible to claim depreciation of your investment property against your income.

While Australia has experienced strong property price growth, it’s the land that does most of the heavy lifting. Conversely, dwellings themselves tend to depreciate over time, so the Australian Taxation Office (ATO) allows property investors to claim the loss of value as a tax deduction against their taxable income every financial year.

What is rental property depreciation?

Rental property depreciation is for property investors looking to claim various depreciating items on their property against their total income. Quite a few property investors are unaware that they can claim depreciation allowances on their rental property.

A few things changed with property depreciation after the 2017 Federal Budget. Generally, there are two types of allowances you can claim. The first is depreciation on assets. This refers to the items inside the property such as the oven, air-conditioners, carpets, curtains and more.

The second is capital works, which refers to the cost of constructing the building itself including materials, garage, driveways, brickwork and more.  

The amount you can claim will vary depending on the type of property, its age, and many other factors. You can use a depreciation calculator to get an estimate of how much you can claim.

Related: What deductions can you claim on an investment property?

How does claiming depreciation on property work?

As mentioned there are two areas with which you can claim depreciation on your investment property.

Capital works

This is the cost of building the investment property. This depreciation is spread over 40 years, which is the given lifespan the ATO says a building lasts before it needs replacing.

Depreciating asset

According to the ATO, this is “an asset that has a limited effective life”. This includes internal fixtures and fittings such as stoves, carpets and so on. The ATO has a handy list on its website of all that you can claim. For example, the given life of carpet is 10 years.

How do I claim depreciation on a rental property?

If you have a loan on a rental property, there is an easy way you can increase your return and improve your cash flow. It is called a property depreciation report. To claim depreciation on an investment property you will also need a tax depreciation schedule.

A tax depreciation schedule is a comprehensive report usually prepared by a specialist Quantity Surveyor that outlines all depreciation deductions claimable for a residential investment property. The quantity surveyor will separate the depreciating assets from the capital works because the two have different rates of depreciation.

Even if your property has been renovated, it’s still possible to claim depreciation as long as you can provide evidence of how much you spent on renovations. After doing the property depreciation report, your accountant will then organise your tax return.

Prime cost vs diminishing value methods

There are also two methods as to how you can claim depreciation.

Prime cost gives you an equal tax deduction each year over the item’s effective life.

Diminishing value, on the other hand, gives you higher claims for the first few years of the item’s life, and smaller claims later on.

One is not necessarily better than the other, but many investors opt for diminishing value as they can claim higher amounts earlier on, which could prove beneficial should one sell a few years after building or buying.

FAQ

Does claiming depreciation change depending on how old the investment property is?

The only age-limited part of depreciation is ‘capital works’, which is how much it cost to build the property. If your property was built after 15 September 1987, you’re able to claim 2.5% depreciation each year until it is 40 years old. You can claim tax breaks on depreciating assets i.e. fixtures and fittings no matter how old the property is, however.

Tags: buying an investment property | investment property

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