Investment Property Depreciation: What You Can Claim

Property investment in Australia offers a powerful wealth-building strategy, and understanding investment property depreciation is crucial to maximizing your returns. Many investors, however, overlook this significant tax benefit, potentially missing out on thousands of dollars in annual deductions. If you're not fully leveraging depreciation, you're essentially paying more tax than necessary. Let's break down exactly what you can claim and how to do it correctly.

Understanding Investment Property Depreciation: A Non-Cash Goldmine

At its core, investment property depreciation is the natural wear and tear of a building and its assets over time. The Australian Taxation Office (ATO) allows you to claim this wear and tear as a tax deduction, reducing your taxable income. The most significant advantage is that it's a non-cash deduction; you don't need to spend any money in the financial year to claim it—the expense is accounted for on paper based on the asset's initial cost.

Two primary types of deductions fall under investment property depreciation:

1. Capital Works Deduction: This covers the structural elements of the building itself. Think of it as the "bricks and mortar" aspect, including the roof, walls, flooring, and built-in cabinets. For residential properties built after September 1987, you can typically claim this deduction at a rate of 2.5% per year for 40 years.

2. Plant and Equipment Depreciation: This category includes the easily removable assets within the property. This is where the list gets extensive and valuable. It covers items like air conditioners, carpets, blinds, hot water systems, and even smaller items like garbage bins and smoke alarms.

What You Can Actually Claim: The Comprehensive List

The range of items you can claim under investment property depreciation might surprise you. It’s not just the obvious big-ticket items. Here’s a more detailed look:

• Capital Works Examples: The construction cost of the building, including costs for extensions, alterations, and structural improvements like a new carport or pergola.

• Plant and Equipment Examples:

  • Appliances: Dishwashers, ovens, cooktops, range hoods.

  • Fittings: Blinds, curtains, carpets, floating timber floors, light shades.

  • Systems: Air conditioning units, heating systems, security systems, intercoms.

  • External Assets: Garden watering systems, portable gazebos, toolsheds (if not fixed).

  • Miscellaneous: Ceiling fans, garbage bins, shower curtains, door closers.

• Each plant and equipment item has a specific "effective life" set by the ATO, which determines the rate at which it depreciates. A quantity surveyor can accurately calculate this for every single asset in your property.

 

The Essential Tool: Your Depreciation Schedule

To claim investment property depreciation effectively, you need a professional depreciation schedule. This is a comprehensive report prepared by a qualified quantity surveyor that details every depreciable asset in your property, its value, and its depreciation rate over time.

While it's an upfront investment (typically between $500 and $700), a depreciation schedule is itself tax-deductible. More importantly, it often pays for itself in the first year alone by uncovering deductions you would have missed. A qualified expert knows the ATO rules intimately and can ensure your claims are maximized and fully compliant, giving you and your accountant peace of mind.

 

Navigating Rule Changes and Maximizing Claims

It's important to be aware of the 2017 legislation changes. For properties purchased after May 9, 2017, investors can generally only claim plant and equipment depreciation on brand new items or those they personally install in a second-hand property. However, you can still claim capital works deductions on any eligible property built within the last 40 years. This makes a depreciation schedule even more critical to accurately assess what you can claim.

To maximize your investment property depreciation:

• Get a schedule early: Commission a depreciation schedule as soon as you purchase a new property or complete a renovation.

• Keep detailed records: Hold onto receipts for any new assets you purchase or improvements you make.

• Consider effective life: When replacing assets, be aware that items with a shorter effective life offer faster deductions.

 

Common Myths About Investment Property Depreciation

• Myth: "My property is too old to claim." Reality: If built after 1987, you can likely claim capital works deductions. Even older properties may have had eligible renovations.

• Myth: "It will increase my capital gains tax (CGT) later." Reality: While depreciation deductions do reduce your cost base for CGT purposes, the immediate annual tax savings and improved cash flow almost always provide a greater financial benefit.

• Myth: "I can do it myself to save money." Reality: The complexity of tax law and the risk of missing deductions make a professional schedule a wise investment.

 

Your Action Plan for Depreciation Success

• Consult a Professional: Engage a quantity surveyor to prepare a depreciation schedule for your property. This is your foundational step.

• Review Annually: Provide the schedule to your accountant each tax year to ensure claims are processed correctly.

• Update After Changes: If you renovate or add new assets, get your depreciation schedule updated to include the new deductions.

 

Conclusion: Claim What You Are Legally Entitled To

Investment property depreciation is a legitimate and powerful tax strategy that puts money back into your pocket. By understanding what you can claim and partnering with the right professionals, you transform your investment property from a simple income source into a highly tax-efficient wealth-building tool. Don’t volunteer to pay more tax than you should. Take action today, unlock your property’s full potential, and keep your investment journey on a prosperous path.