What depreciation can I claim on my rental property?
Just like you claim wear-and-tear on a car purchased for income-producing purposes, you can also claim the depreciation of your investment property over time against your taxable income.
Some Plant and Equipment items include; ovens, dishwashers, carpet, blinds, lifts & light fittings. These items tend to be more easily removed and have a shorter life span.
(UPDATE: Deductions for plant and equipment items may only apply to commercial properties, brand new properties, if you bought the property prior to May 9, 2017, or some other exceptions – Read about the Budget changes here).
Building Allowance items tend to include; bricks, concrete, tiles, windows, doors & steel.
These items are more permanently fixed into place and have a life-span, according to the ATO, of 40 years from the time they were fixed into place.
In terms of depreciation the ATO has identified 3 main problem areas:
- Incorrectly claiming the building/developers profit as a deduction. You can only claim the builders profit where you engage a builder directly to build your house. You cannot claim the development profit a speculative builder has made as a building/construction cost.
- Assuming you can claim the 2.5% building allowance based upon the purchase price. This is where you need a Quantity Surveyor to estimate the construction costs. The building allowance deduction must be based upon the original construction cost.
- Getting your accountant to prepare the depreciation schedule. Accountants & real estate agents are not allowed to estimate constructions costs. Quantity Surveyors like Washington Brown have been identified in Tax Ruling TR 97/25 as appropriately qualified to estimate the construction costs where the costs are unknown.
There are very few occasions where claiming depreciation is not worth it. The only time I would suggest is if you have purchased a property that was built prior to 1985 and have owned it for 5 years and now want to start claiming depreciation.
In this case, the depreciation benefit may have already been used up and you have left your run too late.