Property depreciation is the wear and tear of property and assets over time. Tax legislation, administered by the Australian Taxation Office (ATO) permits owners of income-producing properties to claim approved depreciation as a deduction offset against the income. This allows investors to claim the decline in value of the component parts which make up the investment property, over time. This includes the building structure and plant and equipment assets (See list below).
To claim depreciation, you must own (or be in process of owning) an investment property that is rented out or genuinely available for rent. A depreciation schedule is required to maximise depreciation deductions and to substantiate these claims in an income tax return. This is a report that lists all of the depreciating assets in your investment property and their effective lives. You can prepare a depreciation schedule yourself or engage an accountant or quantity surveyor to do it for you. Depreciation is able to be claimed on new and old properties, though it is commonly regarded that newer properties will enable higher depreciation deductions as the asset’s elements are newer and deemed to be higher in value.
There are two methods for calculating depreciation:
- Prime cost method: This method spreads the cost of the depreciating asset over its effective life.
- Diminishing value method: This method calculates depreciation as a percentage of the asset’s remaining value each year.
The ATO provides detailed guidance on how to calculate depreciation yet there are also depreciation calculators available which may be a source of help to those seeking to prepare the items themselves.
The below listing are some examples of depreciating assets in a residential investment property:
- Building structure
- Curtains and blinds
- Electrical and plumbing fixtures
- Hot water system
- Kitchen appliances
- Light fittings
- Swimming pool equipment
- TV antenna
- Washing machine
In our experience, we have obtained typically an average amount of $10,000 in first full financial year depreciation deductions on a house. Below are examples of typical deductions obtained on both new and second-hand properties:
The properties in this table all exchanged contracts post 7.30pm on May 9th, 2017. *First five years calculated on 37% tax rate.
Depreciation is claimable only upon the structural elements of a property and not on the land the investment property is built on.
Claiming depreciation on your residential investment property can help you reduce your taxable income thereby saving money on tax. However, it is important to understand the rules and to claim depreciation correctly. If you are unsure, you should seek professional advice. In addition to Accountants, Quantity Surveyors are among the only professions recognised by the ATO with the necessary skills to estimate construction costs for depreciation purposes.