Investment Property Tax Tips: Understanding Depreciation

A significant tax deduction available to property investors is depreciation of assets. It’s also a complicated area that leaves many investors confused. To avoid inaccurate tax claims or missed opportunities, read on to find out more about property depreciation.

What is depreciation?

Depreciation refers to the decline in value of an asset over time, often due to wear and tear. For example, a car generally depreciates in value as soon as it’s driven out of the showroom and continues to decline each year due to age and use. Similarly, the value of a building and its fixtures also depreciates.

So, can I claim depreciation on an investment property?

When you own an investment property, you can claim depreciation as a tax deduction on your annual tax return. This deduction is designed to offset the cost of repairing or replacing assets in your property, and can significantly reduce your taxable income. But what exactly you can claim depreciation on is impacted by the age of the property.

Brand new properties can provide tax deductions for up to 40 years, where as some older properties have very little if any available depreciation.

Claiming a decline in value of assets

Deductions can be claimed for the depreciation of assets that cost over $300, as their value decreases over its effective useful life. Assets that fall under this category for rental properties may include floating timber flooring, carpets, curtains, as well as appliances such as washing machines and fridges, and even furniture.

Depreciation on construction and renovation costs

Another expense that can be claimed under depreciation is the original building costs for a house built after 17 July 1985 and any structural improvements, alterations and extensions to the property.

The depreciation of these expenses is generally calculated at 2.5% p.a. over 40 years or 4% p.a. over 25 years. You can only claim these expenses for the time periods that the property is rented. Deductions can not be claimed until construction is complete.

Please seek tax advice from a professional to ensure that your claims are accurate.

For help finding a property that gives you the best tax benefits, book a free consultation with us today. Get personalised guidance and strategic advice from property investment expert, Michael Sloan.