Property Depreciation in Australia

What is it, how does it work and what does it mean for you?

Property depreciation is like a property investor’s secret weapon when it comes to tax time.

That’s because, by understanding what it is and how it works, you can significantly maximise your tax return each year.

So What is Property Depreciation?

Simply put, property depreciation refers to the decline in value of a property’s assets over time.

This decrease in value can be claimed as a tax deduction by Australian property investors, to reduce their taxable income.

Essentially, it’s a way for investors to account for the wear and tear on an investment property, and the decline in value of its assets (structure and fixtures).

The Australian Taxation Office (ATO) allows property investors to claim these deductions, leading to substantial tax savings.

How Does Depreciation Work and How is it Calculated?

Depreciation works by allowing property investors to claim deductions on both the building’s structure and its fixtures over time. There are two primary methods of calculating depreciation: the Prime Cost method and the Diminishing Value method.

Here, we’ll explain both:

Prime Cost Method: The Prime Cost Method deducts a uniform amount each year over the asset’s effective life.

For instance, under this method, you’d calculate an annual depreciation by dividing the asset's cost by its effective life. If an asset costs $10,000 and has an effective life of 10 years, the annual depreciation would be $1,000.

Diminishing Value Method: The Diminishing Value Method deducts a higher amount in the earlier years of the asset's life, that tapers as time goes on.

For example, if an asset costs $10,000 with an effective life of 10 years and a depreciation rate of 20%, the first year's depreciation would be $2,000 (20% of $10,000). The following year, the depreciation would be 20% of the remaining value ($8,000), which equals $1,600, and so on.

The ATO provides detailed guidelines on which method to use and the effective life of different assets.

By calculating these deductions accurately, investors can reduce their taxable income and save money.

Does Depreciation Apply to All Investment Properties?

While depreciation applies to most investment properties built after July 1985, benefits may vary based on the type and age of the property, and the value of its fixtures and fittings.

For instance, even older properties may qualify for significant deductions on renovations and improvements made after this date.

On the other hand, newer properties typically offer higher depreciation claims because their assets are newer and have a longer remaining lifespan.

It's important to note that legislative changes in recent years have also impacted the ability to claim depreciation on second-hand assets for properties purchased after a certain date, so it’s best to check with a professional tax agent to make sure you’re claiming correctly.

What is a Depreciation Schedule and Why Do Property Investors Need One?

Given depreciation is often one of the biggest tax deductions a property investor can claim each year, the best way to stay on top of it is to have a Depreciation Schedule drawn up.

A depreciation schedule is essentially a detailed report that outlines the tax deductions property investors can claim for the depreciation of their investment property's assets (excluding land). It includes information on both the building structure itself, as well as its fixtures and fittings.

It breaks down the depreciation of both the building structure and the fixtures, providing a year-by-year outline of the deductions investors can claim.

Without a depreciation schedule, you risk missing out on substantial tax savings come June 30.

Who Should Property Investors See to Get a Depreciation Schedule Done Up?

To get a depreciation schedule drawn up, property investors should engage the services of a qualified quantity surveyor.

These professionals are experts in estimating the construction costs and value of the property’s assets, ensuring the schedule is accurate and compliant with tax regulations.

Quantity surveyors will inspect your property, assess its assets and provide a comprehensive depreciation schedule tailored to maximise your tax deductions each year

Given the impact a depreciation schedule can have on your tax, choosing a reputable surveyor is incredibly important.

Understanding property depreciation and how to create a depreciation schedule is essential for all Australian property investors.

That’s because, by leveraging it property, and ensuring your investments are working harder for you, you’ll enjoy significant tax benefits each and every year.

It's all about making smart, informed decisions to enjoy the rewards of savvy investing!

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