When it comes to investment properties, depreciation is your unsung hero. It’s a powerful way to save on tax, boost your cash flow, and make your property work harder for you. In this guide, we’ll unpack everything you need to know about depreciation for investment properties in Australia, including real-world examples, tools, and tips to maximise your tax savings. Let’s dive in!
What is Depreciation?
Understanding Depreciation for Investment Properties
Depreciation is a non-cash deduction that allows property investors to offset the decline in value of their investment property’s structure and assets over time. By claiming depreciation, you can reduce your taxable income, thereby lowering your tax liability and improving cash flow.
Example: If your property’s value decreases by $10,000, you can deduct this amount from your taxable income, effectively reducing the taxes you owe.
Why Depreciation Matters for Property Investors in Australia
If you’re not claiming depreciation for investment properties, you’re leaving money on the table. Depreciation can significantly reduce your taxable income, giving you more cash flow to reinvest or cover other expenses. Plus, it’s a deduction that doesn’t require any out-of-pocket expenses!
Key Benefits:
- Lower Taxes: Depreciation deductions decrease your taxable income, resulting in lower tax payments.
- Increased Cash Flow: The tax savings from depreciation can be used to reinvest in your property or fund other investments.
- Higher Return on Investment (ROI): By reducing expenses through tax deductions, your overall return on investment improves.
Types of Depreciation for Investment Properties in Australia
1. Capital Works Depreciation (Division 43)
This covers the structural elements of your property, such as walls, floors, and roofs. Properties built after 16 September 1987 are eligible for capital works deductions, which you can claim at 2.5% per year over 40 years.
💡Pro Tip: Even renovations completed after this date are claimable, so keep your receipts handy! TaxTank’s automated depreciation feature means you can add your renovation project costs directly into the software and we do the tax calculations for you ensuring you don’t miss out and abide by the ATO’s complicated rules.
2. Plant and Equipment Depreciation (Division 40)
This covers removable assets within an investment property, such as air conditioners, carpets, and appliances. However, due to legislative changes introduced in 2017, second-hand or previously used plant and equipment assets can no longer be claimed for depreciation unless the property was purchased before the changes took effect.
For investors buying brand-new properties, this remains a key tax advantage, as new plant and equipment items can still be fully depreciated over their effective lifespan, often resulting in higher deductions in the early years of ownership.
Common Plant and Equipment Depreciation for Investment Properties
| Asset | Effective Life | Prime cost rate | Diminishing value |
| Packaged air-conditioning units | 15 years | 6.67% | 13.33% |
| Hot water systems | 12 years | 8.33% | 16.67% |
| Bathroom exhaust fans | 10 years | 10% | 20% |
| Carpet | 8 years | 12.50% | 25% |
| Smoke alarms | 6 years | 16.67% | 33.33% |
| Light fittings | 5 years | 20% | 40% |
How to Claim Depreciation for Investment Properties
To claim depreciation for investment properties, it’s essential to have a depreciation schedule prepared by a qualified quantity surveyor. This detailed report identifies all depreciable assets within your property and outlines their respective depreciation rates, ensuring you maximise your tax deductions in compliance with ATO guidelines.
What is a Depreciation Schedule?
A depreciation schedule is a detailed report prepared by a quantity surveyor. It outlines all the items in your property that can be depreciated and their respective rates. This document is essential for maximising your tax deductions.
Who Can Prepare a Depreciation Schedule?
Only qualified professionals, like quantity surveyors, can prepare a depreciation schedule. They’ll inspect your property, list all eligible deductions, and ensure you’re not missing out on any savings.
Costs and Benefits of a Professional Depreciation Schedule
While a depreciation schedule can cost between $300- $800, it’s a small price to pay for potentially thousands in annual tax savings. Plus, the cost of the schedule itself is tax-deductible!
Do I Need A New Schedule for New Assets?
In short, no. For individual assets purchased for your property, such as a new oven or carpet, you can claim depreciation for investment properties without needing a new schedule. In TaxTank, we automatically apply ATO-defined depreciation rates using both the prime cost and diminishing value methods, so there’s no need to crunch the numbers when adding new assets, and you can write off old ones at the press of a button to maximise your claim.
Similarly, structural improvements like renovations can be managed effectively in TaxTank. By grouping capital expenses together and setting the depreciation commencement date from the completion date, you can ensure accurate and compliant depreciation claims for these enhancements.
Key Depreciation Tools and Resources in Australia
CoreLogic and Depreciation Estimates
CoreLogic provides property data, including value forecasts and insights that help determine depreciation potential. Integrating these tools into your strategy ensures you’re making informed decisions.
💡 TaxTank integrates with CoreLogic for estimated market values and property forecasts to track property performance and equity,
ATO Depreciation Tools and Resources
The ATO offers free resources to help property investors understand their depreciation entitlements. Use their online calculators for quick estimates.
TaxTank’s Automated Depreciation for Investment Properties
With TaxTank, you can simplify depreciation for investment properties. Adding existing depreciation schedules, new builds and renovation projects for a property is relatively fast and painless in TaxTank. The better news, once added, the schedules automatically allocate to future years to ensure nothing is missed year after year
Real-World Applications of Depreciation for Investment Properties
Maximising Tax Deductions with Depreciation for Investment Properties
Depreciation isn’t just for the rich. Whether you own a one-bedroom flat or a sprawling villa, claiming depreciation can significantly improve your financial outcomes.
Case Study: Sarah owns a $500,000 apartment built in 2010. Her depreciation schedule shows $6000 in deductions annually**.
This reduces her taxable income, saving her $1,800 a year in taxes (based on a 30% tax rate).
Case Study: Depreciation for an Apartment vs. a House
- Apartments: Often have higher plant and equipment values (e.g., elevators, gym equipment).
- Houses: Benefit more from capital works deductions.
Each property type has its perks, the key takeaway is understanding what works best for your situation.
Common Mistakes to Avoid
- Not getting a depreciation schedule.
- Failing to claim eligible renovations.
- Assuming older properties don’t qualify.
Depreciation Rules and Updates in Australia
ATO Guidelines on Depreciation for Investment Properties
The ATO has specific rules for claiming depreciation for investment properties, such as restrictions on second-hand plant and equipment for properties purchased after 9 May 2017. Staying compliant ensures you maximise deductions without triggering an audit.
Avoid Surprises from Depreciation Adbacks
When selling an investment property, it’s important to understand how depreciation claims can affect your Capital Gains Tax (CGT) obligations. Depreciation deductions you’ve claimed over the ownership period can reduce the property’s cost base, potentially increasing the capital gain subject to tax upon sale. This process is often referred to as depreciation add-back.
💡 TaxTank updates all changes in legislation and helps you track depreciation adbacks so you don’t have to worry. All previous laws are also grandfathered so you don’t miss out on previous year’s deductions.
FAQs on Depreciation for Investment Properties
1. Can I claim depreciation on an old investment property?
Yes! While older properties might not qualify for capital works deductions, you can still claim plant and equipment depreciation if you’ve purchased new assets or renovated after purchasing.
2. What happens if I renovate my investment property?
Renovations are gold for depreciation. New assets and structural improvements are fully claimable. Just ensure you keep detailed records, or if its major works, update your depreciation schedule.
3. Can I claim depreciation on a holiday rental?
Yes, as long as the property is genuinely available for rent, you can claim depreciation for the time your property is holiday let (apportioning for any private use of course)..
4. How does depreciation affect capital gains tax?
When selling an investment property, depreciation can impact Capital Gains Tax (CGT) by adjusting the property’s cost base. Capital works deductions (e.g., structural elements like walls and roofs) are deducted from the cost base, potentially increasing the taxable gain. Fully written down plant & equipment depreciation (e.g., appliances, carpets) generally doesn’t affect CGT unless the asset is sold separately. However, while depreciation may slightly increase CGT upon sale, the ongoing tax savings and improved cash flow during ownership usually far outweigh the impact, making it a key strategy for investors.
Conclusion
Depreciation is a powerful tool for property investors in Australia. By understanding the basics, leveraging professional schedules, and staying informed about the latest rules, you can maximise your tax savings and boost your property’s profitability. Ready to unlock the full potential of your investment?
Ready to make property tax and depreciation work for you? Dive into TaxTank’s user-friendly platform and let us handle the compliance stuff. Sign up for your free 14 day trial today!
