Depreciation benefits for your investment property

Depreciation benefits can be often overlooked when owning an investment property. The tax benefits of investing in a rental property can be complicated and delicate, but provide an important benefit for landlords, helping to minimise tax at the end of the financial year. As a property investor, it is important to know about the claiming depreciation on rental properties, and the tax benefits you may be able receive on your investment property, or when looking to buy an investment property.

In this video, we discuss how investment property depreciation can work for investors and outline the basics of depreciation for investment properties and what benefits you may be able to receive.

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 What is depreciation for property?

Depreciation on an investment property is a tax break allowing investors to offset the property’s decrease in value from their taxable income. These deductions can be on both the drop in value of the building’s structure, along with items the decline in value of plant and equipment assets (eg: dishwasher, oven, carpets, blinds, etc). It allows investors to pay less tax, and is also a “non-cash deduction”, meaning it does not have to paid for. The deductions are built into the purchase.

How is depreciation calculated?

For any type of investment property, a specialist quantity surveyor can prepare a tax depreciation schedule. The schedule includes all deductions from capital works, plant and equipment depreciation that an investment property will receive over its lifetime. An accountant will use the schedule of depreciation for the purposes of calculating tax deductions each financial year. These deductions reduce taxable income, meaning less tax is payable.

 All buildings will depreciate from their date of completion, with investors able to claim depreciation deductions whenever the property produces income. They are depreciated according to their effective life, with that life for property being 40 years, meaning tax depreciation extends that full 40 years. Buildings constructed after September 1987 will only have fittings and renovations made after September 1987 qualify for a tax depreciation schedule. Property Investors should have a tax depreciation schedule prepared as soon as possible after settlement of the purchase.

There are two methods when claiming depreciating assets and your accountant can advise of which is the best method for you:

1. Prime Cost Method – gives you an equal tax deduction each year over the item’s effective life.
2. Diminishing Value Method – gives you higher claims in the first 5 years of the item’s effective life, and smaller claims later one.

Important considerations before claiming depreciation on a property

For any capital works assets, it is important to keep expense records, including the following over the 40-year eligibility period:

• Details of the type of construction work completed
• Date the work commenced
• Date the work was completed
• Cost

All other records of rental property depreciation expense (e.g., receipts for plant and equipment assets or maintaining your investment) should be kept from the beginning to end of their usable life, as well as another five years after you lodge your tax return.

In conclusion, real estate investors should consider depreciation benefits in their as it is a legitimate deduction that can be used to lower your taxable income. The value of the property will not reduce, just your potential tax liability. In order to get a better understanding of depreciation benefits, you should consult your accountant, tax adviser, or qualified quantity surveyor for tax time tips.

If you're ready to discover how you can rent out your property with confidence, download our free Step By Step Checklist to Renting Your Property with Confidence.

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If you feel you, or someone you know could benefit from our experience with property management, we’d love to hear from you. Simply reach out.  We hope that has helped you today. If you have any questions, we’d love to talk to you. Our number is 0426 264 771 or 0455 147 755.