A guide to investment property depreciation

Claiming investment property depreciation can be one of the perks of owning an investment property. Here’s a 101 guide outlining how investment property depreciation works.

What is investment property depreciation?

Investment property depreciation is a legal tax deduction related to the wear and tear of your investment property. Put simply, you may be able to claim a tax deduction due to your property getting older with time.

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How much can I claim in investment property depreciation?

The amount you can claim will vary based on the specific property you have purchased and when it was built. The below figures are estimates based on the average of actual reports we’ve completed at Washington Brown.

If you buy a property built between the years 1987 and 2000, you may be able to claim roughly $4,000 in deductions a year, or close to $40,000 over the first 10 years.

If you buy a property built between the years 2000 and 2020, it’s likely you’ll be able to claim around $6,500 a year, or close to $65,000 over the first 10 years you own the property.

If you buy a brand new property, you may be entitled to claim approximately $16,000 in year one and close to $100,000 over the first 10 years.

Please note, however, that these figures are intended as a rule-of-thumb estimate rather than a definitive calculation of how much you’ll be able to claim in depreciation.

Find out more about how to calculate depreciation on an investment property.

What items can I claim on for investment property depreciation?

As a general rule, approximately 98% of the construction cost of a new property can be claimed.

The only things you typically can’t claim on are landscaping (trees and grass grow – they don’t depreciate) and the demolition of the previous house.

A quantity surveyor can itemise all the parts of the building and create what’s called a “Rental Property Depreciation schedule”, which is a roadmap detailing how much you can claim as a tax deduction.

In this case, a tax loss can be a good thing because it reduces your overall tax payable.

A depreciation schedule is generally broken into two parts. The first part lists items that make up the structure of the building (bricks, concrete, roof etc.) and is known as the “Capital Works Allowance”.

The second part relates to items that wear and tear quicker, such as ovens, dishwashers, carpet and so on. These are known as “Plant & Equipment” and depreciate faster, because they won’t last as long.

How do I get a report and how much will it cost?

You can use the free Washington Brown Depreciation Calculator for an estimate of how much you may be able to claim. This will help you decide if getting a depreciation schedule may be a worthwhile exercise.

If you ascertain a depreciation schedule may reduce your tax, you can get a quote from a quantity surveyor (QS).

Not all quantity surveyors are the same and the price may vary, but generally speaking, you’ll pay between $400 to $715 for a quality report, with the main variance being whether a site inspection is required.

Will my property need to be inspected?

In 2017 the laws around depreciation changed dramatically. You can no longer claim depreciation on the previously used assets such as ovens or dishwashers. But, you can still claim the depreciation on the structure even if the property is 20 years old.

This means that sometimes you will need an inspection and sometimes you won’t.

A good quantity surveyor should assess your property on an individual basis and advise what the best plan for your property is to achieve the maximum depreciation at the minimum cost.

How long will it take to get a depreciation schedule prepared?

A depreciation report can take as little as three days, but sometimes up to a fortnight. Some factors that widen the gap include whether an inspection is needed and how easy it is to gain access to the property.

The location is also a factor in determining how long a depreciation schedule will take to complete. The more remote, generally speaking, the longer you may have to wait to get a report if your property requires an inspection.

When is the best time to get a depreciation schedule prepared?

The best time to get a report prepared is as soon after the settlement date as possible. A quantity surveyor will be able to inspect your property and see it in the closest condition to what you have purchased.

The depreciation schedule is generally valid for the life of the building but it is recommended you update the report if you do any renovations, repairs or need to replace internal items.

Here’s another tip – if convenient, organise a report in January when quantity surveying firms aren’t as busy, and you might be in a better position to negotiate on fees!

If I have forgotten to get a depreciation schedule, can I get one now and backdate it?

You can generally “backdate” a depreciation schedule by up to two years.

In essence, you will need to amend your tax returns and include the depreciation numbers that you have missed out on.

The depreciation report starts from the date you settled on the property – not from when you engage the quantity surveyor to prepare your depreciation schedule.

There are two key steps you must take to backdate depreciation properly:

1. Work with a quantity surveyor to create a full depreciation schedule for your property. They will inform you which items can be claimed. They will also discuss rental property depreciation rates with you.
2. Bring the depreciation schedule to your accountant. He or she should alter your tax returns so that you claim for all of the depreciation you’re entitled to.

Can I claim depreciation on old properties or is it just new ones?

The laws changed in 2017 and there is a big difference between claiming depreciation on new property compared to second-hand property.

If you acquired a second-hand residential property with a settlement date of 10 May 2017 or later, and it contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.

This refers to the Plant and Equipment portion of a depreciation schedule, including: ovens, dishwashers, lights, air-conditioners, televisions, carpets, lounge suites and blinds.

However, the Building Allowance, or claims on the structure of the building, has not changed at all. You will still need a depreciation schedule to calculate these deductions. This part of the schedule includes things like brickwork and concrete, so you’ll still be able to claim for depreciation on those aspects of your property.

Investors in brand-new properties can carry on claiming full depreciation on both the Plant and Equipment and Building Allowance.

These government changes were made because it was felt that property investors were over-claiming on second-hand depreciable items.

Can I claim on renovations?

The simple answer is yes – provided the items you acquire are brand new.

But if you go and buy a second-hand oven off Gumtree and have it installed, the item has been previously used and is no longer classified as depreciable. The key, again, is the term “previously used”.

If you renovate a house while living in it, then sell the property to an investor, the assets will be deemed to have been previously used and the new owner most likely won’t be able to claim depreciation on the Plant and Equipment.

Likewise, it is worth remembering that if you buy a property that’s been renovated by someone else and they lived in it for six months or a year prior to the sale, you generally can’t claim depreciation on the renovated appliances, carpets and furniture in the future, because they have now been previously used.

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Cover image source: Ekaterina Kamenetsky/Shutterstock.com

About Tyron Hyde

Tyron Hyde is CEO of Washington Brown, a quantity surveyor organisation providing depreciation reports. He is also the author of Keep Claiming It! A Guide to Property Depreciation.