Maximising your Returns: How Property Depreciation Works

Property tax depreciation refers to the decline in value of an investment property's assets over time due to wear and tear. The Australian Taxation Office (ATO) allows investors to claim this depreciation as tax deductions, thereby potentially increasing tax refunds and increasing the effectiveness of negative gearing.

How is Depreciation Categorised?

1. Capital Works (also known as Division 43 or Building Allowances)
Capital works, which are eligible for capital works deductions, refer to the structural items that make up the building and those that are fixed to the building.

Some items which fall into this type includes;

Properties constructed after specific dates are eligible for capital works deductions at varying rates. For instance, buildings constructed after 16 September 1987 can typically claim a 2.5% deduction per year over 40 years, however this rate can vary based on when the building was built and the type of building owned.

2. Plant and Equipment (also known as Division 40 or Depreciating Assets)
This includes assets within the property that are removable or subject to wear and tear, like appliances, carpets, and blinds. Each item has its own effective life as determined by the ATO, which dictates how quickly it can be depreciated.

To calculate depreciation, the ATO prescribes two methods:

• Prime Cost Method: This method allows for a uniform depreciation expense each year over an asset's effective life.
• Diminishing Value Method: This method provides a higher depreciation expense in the earlier years of an asset's effective life, reflecting the accelerated wear and tear that often occurs with new assets.

Some items which fall into this type includes;

Legislated Changes to Property Tax Depreciation

It's important to note that legislative changes have impacted depreciation claims. A key one is that property investors who signed contracts to purchase second-hand residential properties after 7:30 pm on 9 May 2017 are no longer eligible to claim depreciation on existing plant and equipment. However, they can still claim depreciation on brand-new plant and equipment they install themselves.

Next Steps

If you would like to understand more on how you can maximise your rental property depreciation deductions, please contact LINK Advisors and we can assist you with this.