Investment Property Depreciation Basics
Investment Property Depreciation Basics
Hey there! At JKL Real Estate, we’re all about helping our family of property investors make the most of their investments. Depreciation is one of those areas that can often be overlooked, but understanding it can help you save significantly on your taxes. Let's break down the basics of investment property depreciation.
What is Rental Property Depreciation?
In Australia, if you own an investment property, you can claim deductions for the decline in value of the building’s structure and the assets within it. These deductions, known as depreciation, can be claimed as a tax deduction on your residential rental properties.
Categories of Depreciation
Depreciation can be claimed under two main categories:
- Capital Works: This covers structural elements of the property.
- Plant and Equipment Assets: These are removable fixtures and fittings.
What are Plant and Equipment Assets?
Plant and equipment assets refer to the removable items in your rental property. Examples include:
- Furniture
- Carpets
- Curtains
- Hot water systems
- Air-conditioners
Each of these items depreciates over time, with their value calculated based on an effective lifespan set by the ATO (usually between 5-10 years). It’s essential to know what you can claim to avoid paying more tax than necessary.
Note: Plant and equipment assets were impacted by the 2017 legislation amendments.
What are Capital Works Deductions?
Capital works deductions cover the general wear and tear of the property’s structure, including:
- Walls
- Roof
- Doors
- Cupboards
If your residential rental property’s construction began after September 15, 1987, you might be eligible to claim these deductions over 40 years. Renovations done after this date may also qualify. For instance, if you bought a rental property for $600k with a building cost of $400k, you could claim up to $10k per year in deductions.
How to Claim Depreciation on a Rental Property?
The best way to claim depreciation is by getting a tax depreciation schedule prepared for your property. Here’s how you do it:
- Hire a Qualified Quantity Surveyor: They will inspect your property and provide a detailed report.
- Share the Report with Your Accountant: This will help in accurately claiming your deductions.
A qualified quantity surveyor is necessary to estimate construction costs for properties built after 1985.
What is a Depreciation Schedule?
A depreciation schedule, usually prepared by a quantity surveyor, lists all the depreciation allowances you’re entitled to claim. This schedule includes:
- A list of depreciable items.
- A timeline showing their decline in value over up to 40 years.
Methods of Calculating Depreciation
There are two primary methods:
- Diminishing Value Method: Reduces the value by a specified percentage each year.
- Prime Cost Method: Applies a static percentage of the item's original value or cost.
The Hidden Catch
The only catch with depreciation is that when you sell the property, you’ll need to reduce your cost base (thus increasing your capital gain) by the amount of building depreciation you’ve claimed. Always consult your accountant for advice tailored to your situation.
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