Claiming depreciation on your property is one of the most critical steps in an investor’s journey. And it’s the only deduction that can be subjective.
All other expenses – such as interest, strata fees etc. must equal the amount you have precisely paid out.
But, having an expert prepare, your tax depreciation report can enhance your claim. So, here are my Top 7 Tax Depreciation tips to take full advantage of the return on your investment property.
Number 1: Maximise the Cost of Construction
Property investors must use the original construction cost when depreciating an investment property.
Depending on the property cycle, you might be able to find properties at dramatically reduced prices – nearer to the original building cost.
So the tip is to make the most of falling market conditions and search for properties where the actual construction cost is close to the current purchase price.
Remember, Australia is a big place and whilst some areas are booming, others are falling.
In my view, if you can find a property where the purchase price is below the construction cost, it’s hard to lose money.
So not only will you pay less stamp duty, but you also increase the chance of a capital gain.
Number 2: Old Properties Depreciate too
When it comes to depreciating older property, even second-hand properties depreciate.
As long as the property was built after 1987, you can still claim the capital works deduction for rental property over 40 years from when they are newly constructed.
The purchase price of your property includes the Land, Building Plant and Equipment.
We help you apportion or break down those categories as a quantity surveyor.
With the new depreciation rules for rental properties, you can only claim the plant and equipment if the property is brand new.
Number 3: Use the Washington Brown Property Tax Depreciation Calculator
For the first time, property investors can get an estimate of the likely tax depreciation deductions on a property before they buy it.
So you, as an investor, can use our website, free of charge, compare apples with oranges and see what works best for you.
For example, you might be considering buying a five-year-old property but are concerned that the depreciation deductions won’t be as high as a brand new one.
Our rental property depreciation calculator Australia estimates instantly what the difference will be.
This calculator uses accurate life data collated from every inspection we do on behalf of our clients.
So the data gets more accurate with time.
Number 4: The Taller the Building, the Higher the Depreciation
Taller buildings attract higher plant and equipment allowances, and the higher the plant and equipment, the higher the depreciation.
Due to the new depreciation law changes, this rule only applies to the depreciation of new rental property.
Plant and equipment refer to necessary services within the building and items within the property itself.
Some of the services required as buildings increase in height are obvious, such as a lift (transport service). Other benefits are less obvious, with fire hose reels and intercoms depreciable under this category.
The other reason tall buildings have a higher rental property plant and equipment ratio is the developer’s amenities. For instance, some high-rise buildings have swimming pools, gyms and even mini cinemas.
Let’s look at the numbers. The first thing to look at is a rough ratio of plant and equipment relative to construction cost (see Table 1).
Now take a look at how this translates into deductions (see Table 2). These allowances all relate to a $400,000 property in a capital city – and are very approximate to allow for illustrative purposes only.
As you can see, the taller the building, the more it can depreciate. But remember that a tall building doesn’t necessarily make a better investment.
It often means there’ll be higher levies and additional expenses, and you also own less land. But at the end of the day, it’s up to you to weigh up the pros and cons and make that final decision.
But remember, with the new depreciation rules for residential rental property, you can only claim the structure of the building on second-hand properties, not the plant and equipment (ovens, dishwashers, carpet etc.)
|Type of dwelling||Percentage|
|Unit <4 floors||10-12%|
|Unit 4-8 floors||20-25%|
|Unit >8 floors||20-25%|
|Type||Year 1||Year 2||Year 3||Year 4||Year 5||Total|
|Unit <4 floors||$8,500||$7,000||$5,500||$4,750||$4,250||$175,000|
|Unit 4-8 floors||$10,000||$8,000||$7,000||$6,000||$5,000||$200,000|
|Unit >8 floors||$12,500||$10,000||$8,000||$7,000||$6,000||$225,000|
Number 5: Small Items and Low Value Pooling
A dollar today is worth more than a dollar tomorrow, so deduct items as quickly as possible.
Individual items under $300 can be written off immediately if purchased brand new.
An important thing to remember here is that your portion is under $300, and you can still write it off.
For instance, an electric motor to the garage door costs an apartment block $2000. If there are 50 units in the block, your portion is $40.
You can claim that $40 outright in your tax return – as your portion is under $300.
You can also try to buy items that depreciate faster. Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate.
So, for instance, a $1200 television attracts a 20% deduction while a $950 TV deducts at 37.5% per annum.
Number 6: Furnish your Property – Investment Property Tax Depreciation Tips
Furnishing your property is another way to increase your depreciation deductions as it attracts higher depreciation rates.
For example, we have calculated that a $20,000 furniture package supplied by a developer can result in an additional $10,000 deduction in the first year alone.
This is because furniture wears and tears faster and has a lower effective life.
In addition to your other depreciation assets, furniture really can enhance your overall claim.
A typical apartment in Bondi Beach, for instance, can attract up to $100 in additional rent per week.
But he warns that furnishing your investment isn’t necessarily the best option for all properties and locations.
It’s better suited to smaller one or two-bedroom apartments in transient areas that attract short-term tenants and holiday rentals.
Number 7: Use an Experienced Quantity Surveyor
Our final investment tip on claiming depreciation on a rental property
Let’s put this issue in perspective; you have just paid hundreds of thousands of dollars for a property – do you want to save a couple of hundred tax-deductible dollars on the ONLY tax break available to you that can be open to interpretation and skill?
The laws have changed frequently over the years, and each building is unique, so it pays to get expert advice.
I suggest you engage a firm that has been around for at least ten years. They will have the necessary experience to analyse your property correctly.
The ATO has identified qualified Quantity Surveyors as appropriate to estimate the original construction costs in cases where that figure is unknown.
Please note that your accountant, real estate agent, and property valuer are not qualified to make this assessment according to the ATO.