There are two types of depreciation deductions available to property investors, both have different definitions as to what is classed as a depreciating asset and also have different time frames attributed to how long that asset can be depreciated. If an investor is seeking to maximise profit through the income generated from a property investment, depreciation (without consideration of a capital gain or loss) plays a very important role in the decision before you purchase that investment property.
- Division 43 capital works deduction.
- Division 40 plant and equipment depreciation
How to calculate your depreciation on the building (Divison 43).
This depreciation relates to the structural components of a property – things like concrete floors, walls, doors, the roof, and even your tiles. Put simply, this deduction covers almost everything that’s part of the building itself, including any structural renovations made before or after you purchased the property.
The capital works deduction allows you to claim 2.5% of the actual construction costs at the time it was built for up to 40 years. So, for example, if your investment property was built in 2015 with a structural cost of $450,000, that means you can claim a 2.5% deduction worth $11,250 each year for 40 years, or until 2055.
IMPORTANT: This only applies to properties built after September 15, 1987, you cannot claim the capital works deduction on properties built prior to this date. However, the good news is that you can still claim the Division 40 plant and equipment deduction on older properties.
What can be claimed under plant and equipment (Division 40)?
The plant and equipment deduction refers to the removable, unattached items within your property. While many investors mistakenly believe that older properties don’t offer many deductions, this valuable tax write-off can still offer you significant savings.
Some examples of deductible plant and equipment items found in investment properties, along with their effective tax write-off periods, include:
- Carpets and blinds (10 years).
- Kitchen appliances (10 to 12 years).
- Ceiling fans (5 years).
- Smoke alarms (20 years).
- Garden watering systems (5 years).
The ATO allows many more deductions, there are about 6000 different plant and equipment assets that can be claimed on an investment property. As an investor, you can utilise many ways to ascertain a properties depreciable items including an app downloaded from Resi Rates, asking an accountant or visiting the ATO current rulings website.
Maximising your depreciation is key to maximising the return on your investment. With a few basic questions, a qualified quantity surveyor can determine if it’s worth creating a deprecation schedule on your property before you have it done. With most reputable quantity surveyors being able to make back their fee within the first 12 months of you lodging a full tax return with the investment property.
With many investors missing out on valuable deductions every year, understanding what you can claim on your investment property can help put more money in your pocket at tax time.