Property investment is a journey filled with opportunities, and understanding property depreciation can be one of the most valuable tools in your toolkit. It’s a concept that might not seem exciting at first, but once you see how it can significantly reduce your tax bill, you’ll want to take full advantage of it. Here’s what you need to know to ensure you’re not leaving money on the table.
What is Property Depreciation?
Think of property depreciation as a way to account for the wear and tear your investment property experiences over time. Just like a car loses value the moment you drive it off the lot, your property gradually loses value as the building ages and the items inside get used. The good news is that the Australian Taxation Office (ATO) allows you to claim this loss in value as a tax deduction.
There are two key types of depreciation you can claim:
1. Capital Works Depreciation (Division 43)
This covers the structural aspects of the property—things like the building’s foundation, walls, and roof. If your residential property was built after September 15, 1987, you can claim 2.5% of the construction cost each year, spread out over 40 years.
2. Plant and Equipment Depreciation (Division 40)
This relates to the items within the property that are prone to wear and tear, such as carpets, appliances, and furniture. The rate at which you can claim these items varies, but each offers a valuable deduction.
How Can Depreciation Improve Your Tax Return?
Depreciation is one of those rare deductions where you don’t have to spend any additional money to claim it. It’s a way to reduce your taxable income without any out-of-pocket costs, which can result in a higher tax refund.
For example, if your property earns $30,000 in rental income and you claim $10,000 in depreciation, your taxable income drops to $20,000. This can place you in a lower tax bracket and significantly reduce the amount of tax you owe.
How to Maximize Your Depreciation Deductions
If you’re serious about maximizing your returns, here are some practical steps to consider:
Get a Professional Depreciation Schedule
A quantity surveyor can create a detailed depreciation schedule tailored to your property. This schedule outlines all the deductions you can claim each year, ensuring you’re not missing out on any potential savings.
Leverage Renovations
If you’ve renovated your property, you can claim depreciation on the new additions. Even better, you might be able to claim the remaining value of the old items you replaced as an immediate deduction—this is known as “scrapping.”
Stay Organized with Records
Keeping detailed records of your property’s purchase price, renovation costs, and the value of items within the property is crucial. These records are the foundation of your depreciation claims and will be essential when it’s time to file your tax return.
What to Keep in Mind
While depreciation can be a game-changer, it’s important to stay informed about a few key points:
- Legislative Changes: Since May 2017, there have been changes to how you can claim depreciation on second-hand plant and equipment in residential properties. If you’ve purchased a pre-owned property, it’s essential to understand these changes and how they might affect your claims.
- Capital Gains Tax (CGT) Impact: Depreciation reduces your property’s cost base, which can increase your capital gains tax liability when you sell the property. It’s a trade-off worth considering, especially if you’re planning to sell in the near future.
- Consult a Professional: Tax laws are complex, and property depreciation is no exception. A tax advisor or accountant who specializes in property investment can provide personalized advice to help you make the most of your deductions.
