Just as you can claim wear and tear on a car bought for income-producing purposes, you can also claim the depreciation of your investment property against your taxable income. 

Investment property depreciation is a big advantage to owning a rental property. But to maximise the benefits you may get from depreciation, you should have a basic understanding of how investment property depreciation works. If you claim too little, it means you are missing out on a chance to save money on your taxes. On the other hand, claiming too much or claiming incorrectly may be viewed as tax fraud that may result in fines that will hurt your pocket. 

Here is a primer on how investment property depreciation works. 

What is depreciation?

Basically, depreciation refers to the decline in the value of assets. Assets are classified as anything that has monetary value and can be sold or converted into cash. 

Depreciation is a tax deduction available to property investors. Your investment property earns income from the rental fee of your tenants. As with other activities that produce incomes, there are several tax breaks you can get from your rental income. 

Usually, these tax breaks are based on how much you’ve spent on the property. If you have spent something for your property, you will get a tax invoice and receipt. These will be used to get a tax deduction when it comes to filing your taxes for the financial year. 

What is investment property depreciation?

Property depreciation is a tax break that allows investors to claim tax deduction for the wear and tear of an investment property over time. It offsets an investment property’s decline in value from an investor’s taxable income. 

Investment property depreciation is usually referred to as a “non-cash deduction” because you don’t have to spend money in order to claim a deduction. It means you don’t have to pay for it on an ongoing basis as the deductions are built into the purchase price of your properties. 

What depreciation can I claim on my investment property?

There are two types of depreciation you can claim on your investment property:

1. Building – The deductions available in a building’s structure. It also covers construction costs, including items like brickwork and concrete. It is commonly known as the building write-off.

2. Plants and equipment – Tax deductions for decline in value of items found within the building. This includes carpets, light fitting, curtains, dishwashers, ovens etc.  

Only properties built after July 1985 will qualify for both types of deduction. However, you can still claim plant and equipment depreciation on an investment property that was built before the mentioned date. 

Depreciation tax deductions are usually higher on newer properties. But all types of investment properties (including old ones) are also qualified for this tax break, and the savings can be significant. 

How to calculate the depreciation of your investment property

With a new understanding of property depreciation, you may be wondering how you calculate depreciation on your investment property assets.

As mentioned, the two categories that property investors can claim depreciation for are the building allowance and plant and equipment allowance. Both categories incur claims.

The building allowance is calculated between 2.5 per cent and 4 per cent per year of the original construction costs, based on the date of construction. 

Meanwhile, plant and equipment has several categories in which items are claimed at varying percentages over their effective life. 

What is the process of investment property depreciation? 

Claiming depreciation on an investment property is not an easy task. There are a lot of calculations and paperwork to be done. A mistake that is detected during an audit can result in you being charged with tax evasion. Below is a guide to the investment property depreciation process. 

What is a tax depreciation schedule? 

If your investment property was built after 1985 and/or the costs of construction are unknown, you are required by the Australian Taxation Office (ATO) to schedule a site inspection with a qualified quantity surveyor to create a tax depreciation schedule. 

A tax depreciation schedule is a comprehensive report that outlines all the depreciation deductions you can claim for your investment property. 

According to Tax Ruling 97/25 by the ATO, quantity surveyors are deemed qualified to estimate the construction costs of a property when those costs are unknown. 

While accountants, real estate agents, valuers or solicitors can offer advice on the other aspects of tax depreciation, construction costs and property depreciation are areas that require highly technical expertise.

 Most property investors choose to arrange a qualified quantity surveyor to inspect their house or unit to prepare a tax depreciation schedule to maximise their claims. 

A depreciation schedule is a detailed report that includes the following:

• Breakdown of building allowance outlays
• Breakdown of plant and equipment costs
• Rates at which you can claim different items and the estimated effective life of the listed items
• How much you can claim annually based on the financial year end 
• Breakdown of your plant and equipment depreciation 

Having a detailed breakdown of these items can give you options for claiming depreciation on your assets based on your needs. 

How do I get a tax depreciation schedule? 

To get a depreciation schedule, schedule a site inspection with a qualified quantity surveyor.  During the set date, a quantity surveyor will visit your property to measure, document and photograph all items qualified for deductions. 

Depreciation schedules can vary depending on several factors. This includes the type of property you own, its location and its size. While the cost can climb up to $1,500 and more, quantity surveyor fees are 100 per cent tax-deductible, which can offset this expense. 

It is advised to create a property depreciation schedule as soon as you choose a property to purchase. Having it done immediately after you settle will give you the most accurate values and lower the potential disruptions for any tenants leasing your property. A depreciation report should also be created before and after scheduled renovations on the property you want to get income rental from, as these renovations can give you big tax deductions. 

A depreciation schedule usually takes around two to three weeks to process. After a depreciation schedule is prepared by the quantity surveyor, you can then hand it to your accountant when tax time comes to process it. 

Conclusion 

Depreciation is a key aspect of your investment property strategy. By knowing how investment property depreciation works, you can make substantial savings and also lower your taxable income.