Depreciation is one of the many great tax breaks that make property investing affordable for the average person. It refers to the decrease in value of a property or asset – such as the carpet wearing and furniture becoming dated – that occurs over the time you own it. Depreciation rates vary according to the age of the property, with new properties collecting the greatest benefits.
As an investor, you can write depreciation off as a tax-deductible expense and in doing so make valuable savings and increase your cash flow. Here’s how:
Also known as capital works deductions, these include construction costs, the cost of altering a building and the cost of capital improvements to the surrounding property.
As a general rule, you can claim a deduction in the 40 years or 25 year period following construction for the costs of anything from extensions (such as a garage or deck) to alterations (e.g., kitchen and bathroom makeovers) to structural improvements (like adding a room or carport).
The amount you can claim depends on the date construction started on your property. The Australian Taxation Office states that a deduction can be claimed for the capital works on residential rental properties built after 17 July 1985. If construction commenced between 17 July 1985 and 16 September 1987, you can claim 4 per cent per annum of the building cost and if construction began after September 1987, the rate drops to 2.5 per cent.
Plant and Equipment
Computers, electrical tools, furnishings, carpet and curtains are all considered as depreciating assets by the tax office. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
The tax office lists all the items you can claim and for how long they can be used (also known as their ‘effective life’). For example, ceiling fans are listed as 5 years, carpet as 10 years, dishwashers as 10 years and ovens as 12 years.
If the asset cost $300 or less you can claim an immediate deduction, and to save on paperwork, depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.
To claim depreciation it’s a good idea to use a qualified quantity surveyor as they will inspect your property and prepare a report for your accountant.
The ATO website also offers a free tax webinar that explains the tax rules about what you can claim.