Every year we talk to owners who are paying more tax than they need to. Not because they have done anything wrong. Because nobody ever told them about depreciation. It is the one deduction you do not have to spend money to claim. And it is the one most people miss.
What depreciation actually is
Your property gets older every year. The building wears out slowly. The oven, the carpet, the blinds and the air conditioner wear out faster. The tax office lets you claim that wear and tear as a deduction, the same way you claim your rates, your insurance and your management fees. The difference is that you do not have to pay anything out of pocket to claim it. The wear happens whether you notice it or not.
There are two parts to it
The building itself. If your property was built after 15 September 1987, you can generally claim 2.5% of the original construction cost each year, for up to 40 years. That covers the bricks, the concrete, the roof, the built in cupboards, the driveway. It applies whether you bought the property new or second hand.
The things inside it. Carpet, blinds, appliances, hot water systems, air conditioning, smoke alarms. These wear out faster, so they are claimed over shorter periods. There is a catch on the second part. If you bought a second hand residential property after 9 May 2017, you generally cannot claim depreciation on the items that were already in it when you bought it. You can claim on anything you install yourself. So the new dishwasher you put in last year counts. The one that came with the house does not. That rule caught a lot of investors by surprise and it is the main reason people assume depreciation is not worth looking at. Often the building deduction alone still makes it worthwhile.
Older properties are not automatically out
We hear this one a lot. "My place is from the seventies, there is nothing to claim." Maybe. But if anyone has renovated it since, and that includes a previous owner, those works may still be claimable even though you did not pay for them. A kitchen from 2010 or a bathroom from 2015 still has years left on it. You would be surprised how often there is something there.
How you get one
A depreciation schedule is prepared by a quantity surveyor. They inspect the property, work out what everything cost and what it is worth now, and give you a report that sets out exactly what you can claim each year. A few things worth knowing:
- It is a one off. The schedule can last up to 40 years, so you pay once and your accountant uses it every year after that.
- The cost of preparing it is itself tax deductible.
- If you have owned the property for a while and never had one done, you may be able to amend previous returns and get some of it back. Your accountant can tell you how far back you can go.
Is it worth it for your property?
Honest answer, not always. A small older unit with no renovations may not produce enough deductions to justify the cost of the schedule. The good news is you do not have to guess. Most quantity surveyors will tell you up front whether they think there is enough in your property to be worth doing, and they will usually say so if there is not. It is a five minute phone call. If you are not sure who to talk to, ask us. We work with owners across Maitland and the Hunter Valley and we are happy to point you in the right direction.
One last thing
Depreciation is not a loophole and it is not aggressive tax planning. It is a standard deduction that sits in the tax act and has been there for decades. Claiming it is simply doing your return properly. If you have owned your investment property for more than a year and you have never had a depreciation schedule done, that is the conversation to have with your accountant before the end of this financial year.
This article is general information only and does not take your circumstances into account. Please speak to your accountant or a registered tax agent before making any decisions about your tax position.