How Property Depreciation Works

Property depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income. Property depreciation assumes that the rental property is actually declining over time as a result of wear and tear. Not many other forms of investment offer comparable depreciation deductions. As a result of property depreciation, the investor may actually have cash flow from the property but may show a tax loss.

There are two different types of property depreciation allowance and these are called the Capital Works Allowance and the Depreciating Assets within the property.

Capital works deduction: 

This is also known as building write-off which it refers to the tax deduction available for the structural element of a building including fixed irremovable assets such as the foundation, walls and roof, doors, windows, sinks and tiles. In a residential property built after the 15th September 1987, capital works deductions are available to be claimed at 2.5% for 40 years. For commercial and other types of non-residential properties, the capital works deductions vary based on the property type. 

Plant and equipment: 

Plant and equipment assets are identified through ATO legislation as assets which have a limited effective life and can reasonably be expected to decline in value or depreciate over the time they’re used. Plant and equipment depreciation rates are calculated based on their effective life which is set by the tax commissioner, and updated regularly through tax rulings.   

The ATO also refers to these respectively as Division 43 and Division 40. The Capital Works (Division 43) allowance is the deduction available for the building’s structure, 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 newer the building the higher the depreciation deductions. Renovated properties can also create depreciation deductions because the property now has new components which may be claimable. An important element of investing in property depreciation is the ability to claim deductions for properties that have been renovated, either by you or the previous owner. You will need to know how much you spent on renovations, because it is an ATO obligation. That’s why it’s so important to keep comprehensive records for each renovation project you complete. If the previous owner completed the renovation you are still entitled to claim depreciation. In either case, where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation. Typically, new property has a lot more depreciation allowance than an older pre-owned property. If you are considering buying a brand new property to maximize depreciation make sure you read the guide on buying off the plan property. Also renovating an older property can increase the amount of depreciation available to an investor as there they are adding capital value to the property such as adding a new kitchen and bathroom can increase the value of the property plus also increase the amount of rent a tenant will pay. Whichever the case, additional capital is typically required depending on the kind of property and renovations required.

Property depreciation Brisbane is a crucial element of your investment property strategy. While depreciation tax breaks are higher on newer properties, they’re available for all investment properties.