What is rental & investment property depreciation?

As a building gets older and items within it wear out, they depreciate in value. The ATO allows property investors to claim a rental & investment property depreciation deduction related to the building and plant and equipment items contained within it. It can be claimed by any owner of an income producing property. This deduction essentially reduces the investment property owner's taxable income – they pay less tax!

When a quantity surveyor completes an investor's capital allowance and tax depreciation claim, two main elements are taken into consideration;

Capital Works Allowance (Division 43) and
Plant and Equipment (Division 40).

rental & investment property depreciation chart

Capital Works Allowance: The capital works allowance is a deduction available for the structural element of a building including fixed irremovable assets; this is commonly referred to as the building write off. Only some properties will qualify for this allowance. Depending on the age of the building you can claim either 2.5% or 4% of its historical construction cost as the following graph represents.

Capital Allowance Deductions (Division 43) are based on the historical cost of the building, excluding the cost of all ‘plant’ and non-eligible items.

If your residential investment property was built any time after 18 July 1985, then you are entitled to claim a Building Write Off Allowance of 2.5% or 4% for 40 or 25 years from the date of construction. The write off allowance available on a property is triggered by the date of commencement of the capital improvement works. All income producing buildings, refurbishments, extensions and fit-outs which have commenced construction within the correct dates should qualify for this Division 43 allowance.

Plant and Equipment: The plant and equipment element is a deduction available for removable assets which are identified through ATO legislation as assets which depreciate at a faster rate than the building. Each plant and equipment item has an effective life and the depreciation available on that item is calculated accordingly.

Our research shows that between 15-35% of the construction cost of a residential building is made up of plant and equipment articles. These include things like carpet, hot water systems, blinds, light fittings and many other items. Maximising their value is the key to maximising a depreciation claim.

Regardless of a building’s age, plant and equipment items attract a tax depreciation claim. Property investors are often misinformed in thinking that tax depreciation is only limited to new properties, when in fact plant and equipment items can be re-valued based on the new purchase price of the building as at the settlement date.