Investment Property Depreciation: How Does It Work?

Investment property depreciation can save investors thousands of dollars each year, minimising your tax and maximising your cash flow.  Depreciation is classed as a non-cash deduction, meaning that investors do not need to spend any money in order to claim it.

Below is a basic summation of what property depreciation is and how it works.   

What is property depreciation?

As a property ages, its structure, and the assets within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation as a tax deduction. Depreciation can be claimed under two categories – capital works and plant and equipment.

Capital works deductions refer to the wear and tear that occurs to the structure of the property and any fixed items like the roof, walls, and driveway.  Plant and equipment deductions refer to the same wear and tear of easily removable fixtures and fittings including carpet, hot water systems, and air-conditioners.

How does investment property depreciation work?

A specialist quantity surveyor can produce a tax depreciation schedule for any type of investment property. The tax depreciation schedule includes all capital works and plant and equipment depreciation deductions an investment property holds over its lifetime.

The investor’s accountant will use this tax depreciation schedule to determine their depreciation deductions each financial year. These deductions reduce the investors taxable income, meaning they pay less tax.

Does property depreciation work differently for older investment properties?

The essentials of property depreciation apply for all types of investment properties. However, owners of older investment properties need to be aware of their eligibility for capital works allowance deductions.

When a property is constructed before 15 September 1987, capital works allowance deductions are not available on the property’s original structure and fixed assets. Lucrative depreciation deductions are still often found on these properties as they have usually undergone some type of renovation that supplies an eligible capital works deduction.

How does the 2017 depreciation legislation changes impact property depreciation?

Depreciation legislation changes made in 2017 mean that owners of second-hand residential properties (where contracts exchanged after 7:30pm on 9 May 2017) cannot claim depreciation on existing plant and equipment assets.  Owners of affected properties can still claim depreciation deductions on the new plant and equipment assets they purchase for the property directly and any capital works allowance deductions.