Many landlords don’t realise the full advantage of the tax depreciation deductions available on their investment.
With tax time fast approaching, I reckon depreciation is one of the least understood financial advantages for property investors. Many landlords are surprised to learn that they can claim depreciation as a tax deduction over the lifetime of their investment properties.
Bradley Beer, from leading tax depreciation schedule supplier BMT Tax Depreciation, has observed landlords are frequently under the misapprehension that they are unable to claim depreciation at all.
Claiming tax depreciation deductions can make a big difference to your cash flow. In fact, tax depreciation deductions are the second largest available from the ATO after interest.
There are two types of tax depreciation deductions that can be claimed.
The first is on capital works, a property’s structure and permanently fixed items such as kitchen cupboards, doors and sinks. These can be claimed for up to 40 years depending on the type of construction and date construction commenced.
It’s not just new builds that are able to claim capital works deductions, either. If a property has undergone structural renovations, tax depreciation deductions could still apply.
“Say a property was built in 1980 and the new owner purchased it as an investment in 2021, then neither capital works nor plant and equipment depreciation deductions are available on the original structure,” Beer says. “However, if it underwent any form of structural renovation since 1987, even by previous owners, then capital works deductions could be available – on top of any deductions related to newly added plant and equipment.”
Capital works typically make up 85-90 per cent of a landlord’s total depreciation claim.
Plant and equipment
The second type of tax depreciation deductions is on plant and equipment, or the easily removable items like carpet and blinds. These assets have a limited effective life as set out by the ATO and can be depreciated over time.
Investors can claim depreciation deductions for more than 6,000 different ATO recognised plant and equipment assets. The catch is that depreciation on plant and equipment assets can’t be claimed in second-hand properties unless an asset is brand new.
Consult a tax depreciation specialist
Any time an update is made to a property, the landlord should contact a depreciation schedule provider. A depreciation schedule is a report that lists all available tax depreciation deductions for a residential or commercial investment property. Most properties, both new and old, have depreciation available.
If a property was constructed decades ago, or was purchased second-hand after legislation changes came into play in late 2017, it’s still important to get in touch with a tax depreciation specialist. Often these buildings have undergone some form of renovation that can result in both capital works and plant and equipment deductions for the owner.