Depreciation Claims on Investment Property
If you’ve recently purchased an investment property, or you’ve been thinking of purchasing one, there’s a good chance you’ve heard of deductions that can be made against the tax you pay. One of these deductions is depreciation of both the property and the contents inside the property.
But what exactly is depreciation? And how does it help come tax time?
Depreciation is essentially a deduction on your tax that allows you, as an investor, to offset the decline in value in both the property and items that are permanent fixtures within the property – ovens, dishwashers, carpets, blinds, air conditioners, and so on. One of the biggest benefits of depreciation is that it is a “non-cash deduction”. This means that unlike other deductible costs associated with owning an investment property, there are no ongoing costs to depreciation; you don’t need to spend anything to get the deduction.
It is important to keep in mind that every item has a lifespan that the ATO says it should last before needing to be replaced. This then creates the length of time that the depreciation will be spread over.
New Builds, Renovations, and Older Homes
One of the biggest questions around depreciation is who can claim. Does the property need to be of a certain age before you can start claiming depreciation or is there an age where you can’t claim depreciation?
Essentially property depreciation can be claimed on a building of any age. If the property was built after July 1985, you can claim deductions on both the building and the fixtures, while if the property was built prior to that date, you can only claim on the fixtures. It is certainly worthwhile having a depreciation schedule produced – saving on your tax is still a saving after all.
So what about claiming on a renovated property? This one is a little more work as you will need to know how much was spent on the renovations (and you do have an obligation to the ATO to provide this information). If renovations were completed by a previous owner of the property, you can still claim. If the cost of the renovations is unknown, you will need to engage a quantity surveyor to make an estimation of the cost of renovations.
Claiming Depreciation on Your Investment
There are two ways that depreciation can be claimed on an investment property: capital works and depreciating assets.
Capital works depreciation looks at the construction costs involved in building the property. We mentioned above that every item that is depreciated has a lifespan. In the case of a new build, depreciation is spread over 40 years as the ATO has ruled that a building lasts 40 years before it needs to be replaced.
Depreciating assets are those with a limited effective life that decline in value over time. In an investment property, this includes items such as light fittings, ovens, cooktops, carpets, furnishings. The ATO has listed all the items you can claim and how long you can claim them for; for example, a carpet is estimated to last 10 years, a cooktop 12 years, and a split system air conditioner 10 years.
It’s important to know when these items were purchased where possible as the depreciation lifespan is different in some categories depending on the purchase date.
How to Claim Depreciation
There are two options when claiming depreciation – the prime cost method and the diminishing value method. It is of course advisable to speak to an accountant about which option best suits your situation.
The prime cost method essentially provides you with an equal tax deduction for each year of the effective life of the item.
The diminishing value method allows you to make higher claims in the first few years after purchase and then smaller claims as the item gets older.
What is a Depreciation Schedule?
Simply put, a depreciation schedule is a report outlining all the depreciation deductions that can be made relating to your investment property. It is a good idea to engage a quantity surveyor to put together the report for you. Quantity surveyors assess the value of the construction work and put together a report for you.
When you own an investment property, it’s essential that you are getting all the tax deductions you are entitled to. Depreciation is an important factor that many property investors forget about and therefore miss out on deductions that could save them in tax. Talk to your property manager or accountant about having a tax depreciation schedule completed on your investment property.