Investment property depreciation 101

1. Understand what investment property depreciation is.

As investment properties get older and the items within them suffer wear and tear, they decline in value. The Australian Taxation Office (ATO) recognises this and allows investors to claim this loss of value as a tax deduction against their assessable income. This is called investment property depreciation. Just as you would deduct your interest payments and the costs of maintaining an investment property, you are allowed to deduct the depreciating value of the property itself and the items within it.

Investment property depreciation is known as a ‘non-cash deduction’ because it doesn’t require any ongoing payments such as interest. The deductions are built into your investment property – so if you don’t claim investment property depreciation in your tax return, you are missing out on a genuine entitlement. It’s your job to claim it and the ATO does not issue reminders. There is a lot to consider when it comes to investment property depreciation and it can be a very complex topic, so don’t be afraid to talk to your financial adviser or read as much in-depth information as possible.

2. Know the difference between the two different types of investment property depreciation.

An investor is effectively able to claim two different types of investment property depreciation. The first is ‘capital works’, a deduction based on the historical construction costs of the property that includes the building’s structure (which may also include the engineering, surveying, design and building fees) along with fixed assets, such as built-in cupboards. Essentially, this is anything that is a permanent fixture or cannot be removed easily from the property.

The second type is commonly referred to as ‘plant and equipment’, and loosely includes any items that can be picked up or easily removed from an investment property, such as curtains, floor coverings, appliances or a hot water system.

It can sometimes be difficult to distinguish between these two types of depreciation, and many items we consider to be one type (such as air conditioning units) can actually be made up of components that fall into both categories.

3. Realise the depreciation benefits of buying or building new versus buying established.

For any properties built after 1985, investors can effectively claim investment property depreciation (usually at a rate of about 2.5 per cent per annum) for up to 40 years. This means if you buy or build a brand-new investment property, you will be able to claim depreciation for the full 40 years, meaning you can claim maximum tax deductions against your assessable income.

Most investors don’t realise that the tax benefits obtained through investment property depreciation can be equivalent to as much as 60 per cent of the total purchase price of the property, which can equate to hundreds of thousands of dollars! However, if you purchase a property than is 10 or 15 years old, you are only able to claim investment property depreciation for 30 or 25 years, which is an immediate disadvantage. For this reason, it pays for investors to buy or build brand-new investment properties.

4. You need to spend money to save money.

If you want to claim depreciation against your investment property, you will need to engage the services of a tax depreciation company who will undertake an inspection of your investment property and provide you with an ATO-compliant tax depreciation schedule to give to your accountant. It is important to make sure the company or consultant you engage is a member of the Australian Institute of Quantity Surveyors (AIQS). You only need to have this schedule prepared once, and it will outline all the benefits you can claim. The cost of this schedule is tax-deductible, and although some investors balk at the fee, it is a drop in the ocean when you consider that it could possibly save you hundreds of thousands of dollars over the next 40 years (depending how long you hold onto the property for).

5. It’s never too late to claim your full depreciation benefits!

It is estimated that only one in five property investors claim the full depreciation entitlements available to them. If you are one of these people, remember that it is never too late to start claiming your full benefits. Even if you have owned and rented your investment property for a number of years, you can have a depreciation schedule prepared at any time. If you supply it to your accountant, they will be able to file an adjusted tax return for you, to enable you to obtain any unclaimed investment property depreciation benefits.

So, with EOFY just around the corner, now is the time to follow up your investment property depreciation benefits with your accountant. If you have not claimed depreciation, engage the services of a reputable professional as soon as possible to have your schedule prepared. Or, if you are already claiming depreciation against your investment property, conduct a quick audit with your accountant to make sure you are claiming all possible deductions for both ‘capital works’ and ‘plant and equipment’. The more money you save, the faster you will be able to re-invest to expand your portfolio!

I always recommend that you find yourself an experienced accountant who understands tax, property investment and the depreciation benefits you are entitled to. They can give you all the advice you need – not just at the beginning of the financial year but right throughout the year. If you find yourself in a stronger financial position at the end of financial year, you might consider investing your tax return and expanding your property portfolio.