Investment property depreciation can save investors thousands of dollars every year. However, many people don’t realise the benefits of tax depreciation. This often results in many failing to claim depreciation and missing out on maximising their cash flow.
While you don’t need to be an expert, understanding the investment property depreciation basics and how it works can help inform your long-term investment strategy.
What is property depreciation?
As a property gets older, its structure and the assets within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation as a tax deduction. Depreciation can be claimed under two categories – capital works and plant and equipment.
Capital works deductions refer to the wear and tear that occurs to the structure of the property and any fixed items like the roof, walls and driveway. Plant and equipment deductions refer to the same wear and tear of easily removable fixtures and fittings including carpet, hot water systems and air-conditioners.
Depreciation is classed as a non-cash deduction, meaning that investors don’t need to spend any money in order to claim it.
How does investment property depreciation work?
A specialist quantity surveyor can produce a tax depreciation schedule for any type of investment property. The tax depreciation schedule includes all capital works and plant and equipment depreciation deductions an investment property holds over its lifetime.
The investor’s accountant will use this tax depreciation schedule to determine their depreciation deductions each financial year. These deductions reduce the investors taxable income, meaning they pay less tax.
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