How does property depreciation work
While we all hope (and pray) that our houses only increase in value over time, they'll still invariably lose value in other ways. We're ignoring land size and location today, obvs. This is all about the building itself and all the expensive bits attached to it. Let us delve into the world of property depreciation.
So what is depreciation?
It's a tax break where investors can deduct their property's decline in value from their taxable income. By Australian law, you can claim tax deductions on the decline in value of the building itself and the fixtures and big-ticket items (appliances like ovens, dishwashers, air conditioning, carpets, etc.) permanently attached to the property. These are AKA 'Plant and Equipment'.
Consider all this the 'wear and tear' on your property over time.
Being a 'non-cash deduction', it's built into the purchase price of your home or investment property and can save you thousands of dollars in tax.
Depreciation for investment properties
If you plan to purchase a property to generate income, you can claim depreciation on the building and its permanent fixtures against your taxable income.
To make substantial savings, property investors can simply arrange a qualified quantity surveyor to inspect the property and send a report to their nominated accountant on their behalf. An accountant is not legally allowed to assess your home for depreciation, but they do crunch the numbers for you.
A fun fact is that experienced investors will take depreciation into account before investing, so it's wise to get acquainted with this topic.
Cut off dates – where depreciation can get confusing
It's worth noting that a property is never too old or renovated to claim depreciation. However, if the property's building commenced before 1985, your taxable depreciation claim won't extend to the structure, only Plant and Equipment.
If your structure was built after 1985, you'll enjoy both the Building Allowance and Plant and Equipment claims.
Commercial and industrial properties have different cut-off dates again, but we'll save that for another time (!) and let you do some googling at your leisure!
How do you calculate depreciation?
To calculate the annual rate of depreciation on a rental property:
Depreciation = Cost basis / property's useful life.
It does differ for residential and commercial properties, so best to have a play around with the swathe of calculators online!
We also HIGHLY recommend to investors to get a tax depreciation schedule. You can use a company like BMT to get this, and then pass it onto your accountant at tax time!
When it comes to property-related finances, and this topic in particular, we always recommend having a chat with your accountant or financial adviser to give you personal, tailored advice relevant to your property and your situation. And don't forget, we're also happy to answer any questions you might have!
Take care,
Tabitha