As a property investor, claiming depreciation on your investment property can be a significant tax benefit. Depreciation is the decrease in value of an asset over time, and it can be claimed as a deduction on your taxable income. But how much depreciation can you claim on your investment property? In this article, we will delve into the world of depreciation and provide you with a comprehensive guide on how to claim it.
What is Depreciation?
Depreciation is the decrease in value of an asset over time, resulting from wear and tear, obsolescence, or other factors. In the context of investment properties, depreciation refers to the decrease in value of the building and its fixtures over time. This can include things like carpets, appliances, furniture, and even the building itself.
Type of Depreciation
There are two types of depreciation that can be claimed on an investment property:
- Capital Works Deduction: This type of depreciation refers to the decrease in value of the building itself, such as the walls, roof, and foundation.
- Plant and Equipment Depreciation: This type of depreciation refers to the decrease in value of fixtures and fittings within the property, such as appliances, furniture, and air conditioning units.
How Much Depreciation Can You Claim?
The amount of depreciation you can claim on your investment property depends on several factors, including:
- The cost of the property: The more you paid for the property, the more you can claim in depreciation.
- The age of the property: Newer properties tend to have a higher depreciation value than older properties.
- The type of property: Different types of properties, such as apartments or houses, have different depreciation rates.
- The effective life of the asset: The Australian Taxation Office (ATO) sets the effective life of different assets, which determines the rate at which they depreciate.
Depreciation Rates
The ATO sets the depreciation rates for different assets, which are based on their effective life. Here are some examples of depreciation rates for common assets found in investment properties:
| Asset | Effective Life (Years) | Depreciation Rate |
| — | — | — |
| Building (Residential) | 40 | 2.5% |
| Carpets | 10 | 10% |
| Kitchen Appliances | 6 | 16.67% |
| Furniture | 5 | 20% |
How to Claim Depreciation
To claim depreciation on your investment property, you will need to:
- Keep accurate records: Keep receipts, invoices, and other documentation to support your depreciation claims.
- Engage a Quantity Surveyor: A Quantity Surveyor can help you prepare a depreciation schedule, which will outline the depreciation deductions you can claim for your property.
- ** Lodge a tax return**: Claim your depreciation deductions on your annual tax return.
Depreciation Schedule
A depreciation schedule is a report that outlines the depreciation deductions you can claim for your property. It includes information such as:
- The asset’s cost and effective life: The cost of the asset and its expected life, as set by the ATO.
- The depreciation method: The method used to calculate the depreciation, such as the prime cost method or the diminishing value method.
- The depreciation deductions: The amount of depreciation you can claim each year.
Tips and Tricks for Maximizing Depreciation Claims
Here are some tips and tricks for maximizing your depreciation claims:
- Claim depreciation on all eligible assets: Don’t forget to claim depreciation on all eligible assets, including fixtures and fittings.
- Use the correct depreciation method: Choose the depreciation method that best suits your situation, such as the prime cost method or the diminishing value method.
- Get a professional to prepare your depreciation schedule: A Quantity Surveyor can help you prepare an accurate and comprehensive depreciation schedule.
- Keep accurate records: Keep accurate records to support your depreciation claims.
Conclusion
Claiming depreciation on your investment property can be a significant tax benefit. By understanding how depreciation works and how to claim it, you can maximize your deductions and minimize your taxable income. Remember to keep accurate records, engage a Quantity Surveyor, and claim depreciation on all eligible assets. With this comprehensive guide, you’ll be well on your way to claiming the depreciation you’re entitled to.
What is depreciation, and how does it apply to investment properties?
Depreciation is the decrease in value of an asset over time due to wear and tear, age, and other factors. In the context of investment properties, depreciation refers to the loss of value of the building and its fixtures, such as appliances, carpets, and furniture, over time. As an investor, you can claim depreciation as a tax deduction, which can help reduce your taxable income and increase your cash flow.
The Australian Taxation Office (ATO) allows investors to claim depreciation on the building and its fixtures, but not on the land itself. The depreciation rates and methods vary depending on the type of property, its age, and the date of purchase. It’s essential to keep accurate records and seek professional advice to ensure you’re claiming the correct amount of depreciation.
How do I claim depreciation on my investment property?
To claim depreciation on your investment property, you’ll need to keep accurate records of your expenses, including the purchase price, settlement date, and any subsequent improvements or renovations. You may also need to engage a quantity surveyor to prepare a depreciation schedule, which outlines the depreciation rates and amounts for each item.
You can claim depreciation on your investment property by including the deduction in your annual tax return. You’ll need to complete a Depreciation and Capital Allowances schedule, which will help you calculate the depreciation deductions for each year. It’s essential to keep your records up to date, as the ATO may request evidence to support your claims.
What can I depreciate in my investment property?
You can depreciate a wide range of items in your investment property, including the building itself, fixtures, and fittings. Some common examples include carpets, curtains, light fittings, appliances, and furniture. You can also depreciate structural improvements, such as renovations, extensions, and infrastructure upgrades.
However, you cannot depreciate the land itself, as it’s considered a non-depreciable asset. You also can’t depreciate certain items, such as collectibles or artwork, unless they’re used for income-producing purposes. It’s essential to keep accurate records and seek professional advice to ensure you’re claiming depreciation on eligible items only.
How long can I claim depreciation for?
The length of time you can claim depreciation for your investment property depends on the type of property and the date of purchase. For residential properties, you can claim depreciation for 40 years from the date of construction, as long as you’re using the property for income-producing purposes.
For commercial properties, the depreciation period is typically shorter, ranging from 25 to 30 years. You can also claim depreciation on certain fittings and fixtures, such as carpets and appliances, over a shorter period, usually 5 to 15 years. It’s essential to keep accurate records and seek professional advice to ensure you’re claiming depreciation for the correct period.
Can I claim depreciation if I’ve renovated my investment property?
Yes, you can claim depreciation on renovations and improvements to your investment property. However, you’ll need to keep accurate records of the renovation costs, including receipts, invoices, and before-and-after photos. You may also need to engage a quantity surveyor to prepare a depreciation schedule for the renovated areas.
The depreciation rates and methods for renovations vary depending on the type of work done, the date of completion, and the original construction date. You can claim depreciation on renovations over a shorter period, usually 25 to 30 years for commercial properties and 15 to 40 years for residential properties.
How does depreciation affect my capital gains tax when I sell my investment property?
Depreciation can have a significant impact on your capital gains tax (CGT) when you sell your investment property. As you claim depreciation, you’re reducing the cost base of your property, which can increase your CGT liability. This is because the ATO views depreciation as a tax deduction, rather than a reduction in the property’s value.
To minimize your CGT liability, you’ll need to add back the depreciation amounts you’ve claimed to the cost base of your property. This will help reduce your capital gain and minimize your tax liability. It’s essential to keep accurate records and seek professional advice to ensure you’re accounting for depreciation correctly and minimizing your CGT liability.
Do I need a quantity surveyor to claim depreciation?
While it’s not mandatory to engage a quantity surveyor to claim depreciation, it’s highly recommended. A quantity surveyor can provide a comprehensive depreciation schedule that outlines the depreciation rates and amounts for each item in your investment property. This can help ensure you’re claiming the correct amount of depreciation and minimizing your tax liability.
A quantity surveyor can also help you identify eligible items for depreciation, provide evidence for your claims, and ensure you’re meeting the ATO’s requirements. They can also provide advice on how to maximize your depreciation claims and minimize your tax liability. While there’s a cost involved in engaging a quantity surveyor, it can pay for itself through increased depreciation deductions and reduced tax liability.