September 12, 2017

Claiming Depreciation on Investment Property

Residential property investors are in the business of making money, and depreciation is an important component of a property’s profitability. Yet depreciation is also something of a mystery to many investors and is often overlooked, together with many thousands of dollars in potential tax deductions.

Depreciation allows investors to claim the loss of value as a tax deduction against their assessable income.

The major benefit of depreciation is improving cash flow, by reducing taxable income. Depreciation of investment property itself is not necessarily a reason to invest in a property, but when claimed correctly it can make your property investment easier to manage and free up cash for further investment opportunities.

Is depreciation worth it? Here is a very simple example

A newly built 200sqm brick and tile property was constructed at the cost of approximately $250,000, comprising the following:

  • $200,000 of building structure
  • $50,000 of Depreciating Assets (such as floor coverings, blinds and appliances).

The Capital Works Allowance on this property (2.5% of the building cost) works out to be $5,000 per annum. The Depreciating Assets are more complex to calculate since they depreciate at different percentages, but in total, they come to $4,800 in the first year.

This means, in the first year alone, a depreciation deduction of $9,800 can be offset against the investor’s assessable income, resulting in reduced tax liability and increased cash flow.

Clearly, depreciation is important, yet it is also complicated. There are an enormous number of rules that have been added to over time, and it is therefore advisable to get assistance and advice from qualified professionals such as your accountant. The rules vary for different types of buildings – residential, non-residential, manufacturing and short-term traveler’s accommodation.

Please also note that during the recent Federal Budget (2017) there was an announcement limiting the depreciation claims that can be claimed in relation to depreciating assets (plant and equipment) from 1/7/17 for residential investment properties purchased after budget night (9/5/17).

Mark Hann


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