Why property depreciation is a great thing for investors
While we recently touched on the basics of depreciation, we're going to explore how it can make/save you money this week. While it seems counter-intuitive, let us explain…
Depreciation for investment properties, a recap
Depreciation is a tax break where investors can deduct their property's decline in value from their taxable income. Australian law allows you to claim tax deductions on the decline in value of the building itself and the fixtures and big-ticket items (think ovens, dishwashers, blinds, carpets, etc.) attached to the property AKA 'Plant and Equipment'.
It's the 'wear and tear' on your property over time.
How investors can take advantage of property depreciation
Did you know owners of investment properties can claim tax breaks on the depreciating asset (the building and its fittings and fixtures), no matter the property's age? And around 80% of investors haven't actually claimed these entitlements yet?
If you are planning to purchase an investment property to generate income or you have one already and haven't claimed depreciation, the good news is you can really save your dough if you're well-versed, and you can start today.
Being a 'non-cash deduction', there's no cash outlay required. Rather, depreciation is built into the purchase price of your home or investment property and can save you thousands of dollars in tax over many years.
"How", you say? Well, instead of deducting the entire purchase price in the first year, depreciation allows you to stretch out deductions over decades. So, instead of one massive tax break, you'll get smaller tax breaks over a much longer period.
It is important to note that you'll need to engage a qualified quantity surveyor to inspect the property and send a report to your nominated accountant on their behalf to enjoy these breaks and maximise your investment capital. And if you already have an investment property, the ATO will allow you to claim missed deductions from the last two years' tax returns.
What depreciation can I claim for my investment property?
There are two property depreciation categories you can claim:
1. Capital Works Allowance (Division 43) — aka 'building write-off'- includes the structure, including permanent fixtures like bathtubs, roof, walls and doors. It's calculated by taking 2.5% of the total build cost each year for up to 40 years.
2. Plant and Equipment (Division 40) — includes mechanical or removable assets and fixtures, like hot water systems, smoke alarms and blinds, calculated at ~20% depreciation per year for their allocated effective life.
New vs old properties
A property is never too old or too new to claim depreciation, although newer properties will generally yield more tax savings. All properties have a residual life of 40 years, so if your purchased property is 20 years old, you'll have 20 years left to receive your building write-off deductions. That said, it's still a financially worthwhile process to enter into—it's estimated that an investor can receive between $7k - $9k in their first year!
BUTTTTT slight caveat.. When I tried to get a Depreciation Schedule for my property (which is very old), the Tax Depreciation company I called, said it probably wasnt that worthwhile… But still, the call was free, and it’s always good to ask the question!
Want to know more about the power of depreciation? Reach out to your accountant or financial adviser as a first point of call for personal, tailored advice. As always, we're here and most happy to answer any questions, too!
Thanks for stopping by,
Tabitha