Maximizing Tax Benefits Through Property Depreciation

Property depreciation is one of the most valuable tax deductions available to Australian investment property owners. Understanding how to maximize these benefits can significantly improve your property's cash flow and overall investment returns.

What is Property Depreciation?

Property depreciation allows you to claim tax deductions for the natural wear and tear of your investment property and its contents over time. The Australian Taxation Office (ATO) recognizes that investment properties and their fixtures deteriorate and lose value, making these losses tax-deductible.

Two Types of Depreciation

1. Building Allowance (Capital Works Deductions)

The building allowance applies to the construction cost of buildings and certain structural improvements. Key features include:

• 2.5% annual deduction of the construction cost
• Available for buildings constructed after July 15, 1985
• Claimed over 40 years
• Applies to the building structure, not the land

What's Included in Building Allowance:

• Structural elements (walls, floors, roof)
• Built-in cupboards and wardrobes
• Fixed electrical and plumbing
• Driveways and fencing
• Swimming pools and spas

2. Plant and Equipment Depreciation

Plant and equipment refers to removable or mechanical fixtures within the property. These items depreciate at different rates based on their effective life.

Common Plant and Equipment Items:

Depreciation Methods

Prime Cost Method (Straight-Line)

Depreciates the same amount each year over the asset's effective life.

Diminishing Value Method

Higher deductions in early years, declining over time. Generally provides larger initial deductions.

Depreciation Schedules

A depreciation schedule is a detailed report prepared by a quantity surveyor that outlines:

• Every depreciable item in your property
• The construction cost or current value of each item
• The effective life and depreciation rate
• Annual deduction amounts for the next 40 years

Benefits of Professional Depreciation Schedules

• Maximizes your available deductions
• Provides ATO-compliant documentation
• Identifies items you might miss
• Gives precise valuations and calculations
• Can be used for insurance purposes

Recent Changes to Depreciation Rules

Plant and Equipment Depreciation Changes (May 2017)

From May 9, 2017, investors can only claim plant and equipment depreciation on items they've purchased themselves. This means:

• No depreciation on plant and equipment acquired with second-hand properties
• Building allowance remains unaffected
• Items purchased after settlement can still be depreciated
• Renovations and improvements maintain full depreciation benefits

Exceptions to the Rule

• Properties purchased as new from a developer
• Items replaced or improved by the investor
• Properties where construction was completed after May 9, 2017

Maximizing Your Depreciation Benefits

1. Get a Professional Schedule

A quantity surveyor can identify depreciable items worth thousands more than a generic estimate.

2. Time Your Purchases

Consider the timing of your property purchase to maximize first-year deductions.

3. Keep Detailed Records

Maintain receipts and documentation for all improvements and replacements.

4. Consider Renovations

Renovations and improvements can create new depreciation opportunities.

5. Review Annually

Regular reviews ensure you're claiming all available deductions and account for any changes.

Depreciation Examples

Example 1: New Apartment

Example 2: Older Property with Renovations

Common Depreciation Mistakes

• Not getting a professional depreciation schedule
• Claiming depreciation on non-income producing properties
• Missing depreciation claims in early years
• Not updating schedules after renovations
• Incorrect application of the May 2017 rule changes
• Not keeping adequate documentation

Depreciation and Capital Gains Tax

Important considerations when selling your investment property:

• Building allowance claimed reduces your cost base for CGT
• Plant and equipment depreciation doesn't affect CGT cost base
• Keep records of all depreciation claimed
• Consider the impact on your overall tax position

Finding a Qualified Quantity Surveyor

When choosing a quantity surveyor for your depreciation schedule:

• Ensure they're a member of the Australian Institute of Quantity Surveyors (AIQS)
• Check their experience with residential investment properties
• Verify they provide ATO-compliant reports
• Compare fees and services offered
• Look for additional services like insurance valuations