Understanding Investment Property Depreciation

If you’re starting in property investment, one essential part of building your financial wealth should include a depreciation schedule.

Depreciation can help with your tax return, and strategically use these funds to support further investments. That’s why it's critical to understand depreciation and how to leverage it to achieve your financial and lifestyle goals when investing in property.

What is depreciation?

When acquiring an investment property, tax treatment involves considering it as a building with various depreciable assets, also known as plant items.

Property depreciation encompasses deductions from the capital works expenditure on the property and the diminishing value of its contents. Capital works cover buildings, extensions, alterations, or improvements, while property contents refer to non-fixed items like furniture.

To accurately determine your potential deductions, obtaining a depreciation schedule is essential.

This schedule, outlining the rate of asset decline and claimable deductions, should be prepared by an accredited professional, such as a quantity surveyor.

Unlocking value: Why property depreciation matters 

Investment properties are taxable assets designed for income generation through rentals and capital gains. Leveraging depreciation-based tax deductions to account for asset wear and tear can offset taxable income, potentially reducing the tax payable.

Depreciation claims on older properties

For residential rental properties built after 17 July 1985, capital works deductions are claimable over 25 or 40 years. 

If construction costs are unknown, estimates from a quantity surveyor or another qualified professional are acceptable.

However, from 1 July 2017, only new plant items, not second-hand, qualify for depreciation claims.

Differences in depreciation for new investment properties

In the case of a brand-new property, investors can claim deductions on both capital works and depreciating assets (plant items).

The deduction amount depends on property size and potential common areas like lifts and lobbies. Professional calculations are crucial for accuracy.

How to claim a depreciating property

While online depreciation calculators provide rough estimates, seeking professional assistance is advisable due to the technical complexity.

An accredited professional, such as a qualified Quantity Surveyor, should inspect the property in person and create a comprehensive depreciation schedule based on asset age and other considerations whilst shortening the depreciation period and maximining depreciation benefits.

Once armed with the depreciation schedule, you should share it with your Accountant for integration during tax return filings. 

Maintaining records of income, expenses, and the depreciation schedule related to your investment property is also essential.
 

Calculating investment property depreciation

The capital works deduction is 2.5 per cent of total construction costs annually over 40 years.

For plant items, depreciation is based on the effective life span, which can be self-determined or prescribed by the ATO. Depreciation calculations can follow the prime cost (straight line) or diminishing value method.

Low-cost items valued below $300 generally qualify for immediate deductions.

When is the ideal time to claim property depreciation?

Property investors should create a tax depreciation schedule shortly after settling the property.

Although the schedule does not expire, updating it for renovations, repairs, or asset replacements is essential. It is preferable to conduct property inspections before tenants occupy the premises. 

If overlooked in the previous income tax return, rectification is possible within two years from the ATO's assessment notice.

Consult your Ramsey Property Strategist/Buyers Advocate or tax adviser for guidance.

Are you looking for expert guidance with depreciation?

Ramsey Property Wealth leverages its expertise to help our clients set up their depreciation schedules to maximise their tax returns, allowing them to use them for subsequent property investments.

Speak with a member of our property strategy team to get started on your investment journey or how to maximise your property depreciation; contact us today on 1300 001 215 or email us by following the link.