Imagine buying a lottery ticket that won you almost $9,000. It would be pretty amazing, wouldn’t it? Think of all the things you could do with the additional money – pay off debt, buy that new lounge, renovate the bathroom.
What if we told you that on average residential rental property investors can claim this amount in depreciation deductions in the first financial year alone, but around 80 per cent fail to do so. This is because depreciation is a non-cash deduction, meaning that unlike expenses such as interest and property management fees, an investor doesn’t have to spend money to be eligible to claim it. As a result, it’s often missed.
If you haven’t been claiming depreciation on your rental property, here are some fast facts to help you better understand what it is and what you can claim.
In this article, we will answer the following questions:
- What is rental property depreciation?
- What are capital works deductions?
- What are plant and equipment assets?
- What are the 2017 legislation changes and why do they matter?
- What rental properties benefit most from depreciation?
- Should you get a tax depreciation schedule following a rental property renovation?
- Can you claim depreciation on a fully renovated rental property?
- How can you claim depreciation on a rental property?
What is rental property depreciation?
As a property gets older, the building’s structure and the assets within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of residential rental properties to claim this depreciation as a tax deduction. Depreciation can be claimed under two categories – capital works and plant and equipment assets.
What are capital works deductions?
Capital works deductions relate to claims for the wear and tear that occurs to the structure of the rental property and any fixed items like the roof, walls, doors and kitchen cupboards.
Owners of residential property that commenced construction after 15 September 1987 are eligible to claim capital works deductions. These deductions can be claimed at a rate of 2.5 per cent per year for forty years.
If your rental property was constructed before this date, you should still enquire about the depreciation deduction available as often these buildings have undergone some form of renovation which can result in capital works deductions.
What are plant and equipment assets?
Plant and equipment assets refer to the easily removable fixtures and fittings found within a rental property. Common examples include carpet, blinds, air-conditioners, hot water systems and smoke alarms. Depreciation deductions for these assets are calculated based on their individual effective life as set by the ATO.
Unlike capital works deductions, depreciation for plant and equipment assets was affected by the 2017 legislation amendments.
What are the 2017 legislation changes and why do they matter?
Legislation passed in November 2017 brought about major changes to residential plant and equipment depreciation claims. These changes are important because they affect the amount of depreciation you can claim.
Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9 May 2017 cannot claim deductions for previously used plant and equipment assets.
You can still claim depreciation for any brand-new plant and equipment assets you purchase and install in the property once it is income producing. For example, if you purchase a new hot water system while your property is being leased, you are entitled to claim depreciation for this asset.
What rental properties benefit most from depreciation?
While almost all residential property investors are able to claim depreciation, given the 2017 legislation those who build or buy brand new rental property will usually claim higher deductions.
However, any residential property that has either been built or renovated since 1987 will have a structural claim that will give ongoing deductions for forty years.
I want to renovate my rental property. Should I get a depreciation schedule?
If you’re considering renovating your rental property, it’s important to have a tax depreciation schedule prepared. There may be substantial depreciation deductions available for structural elements and plant and equipment assets removed during the renovation. A process known as scrapping allows investors to claim any undeducted entitlements for eligible assets in the year the items are removed.
It’s important to note that if you live in the rental property while renovating, any newly installed plant and equipment assets will be classed as previously used. This means the assets cannot be claimed. Unless there is good reason, you should only install new plant and equipment assets after you have move out of the rental property and it is available for lease. This will ensure you can claim maximum depreciation deductions.
I bought my rental property fully renovated. Can I claim depreciation for the renovation?
If a rental property is considered to have been substantially renovated by the previous owner for selling purposes, you can claim depreciation on the new plant and equipment assets along with any qualifying capital works deductions available. It must qualify as a substantial renovation, not just cosmetic.
A Quantity Surveyor will estimate anything in the property that is part of a previous renovation and calculate the deductions accordingly. This includes items that may not be so obvious, such as new plumbing, waterproofing and updated electrical wiring. For capital improvements to qualify for the division 43 building write-off, construction must have commenced within specific qualifying dates.
Doesn’t my accountant calculate depreciation for my rental property?
No. Specialist Quantity Surveyors such as BMT Tax Depreciation are one of the few select professionals recognised by the ATO under Tax Ruling 97/25 as having the skills to estimate construction costs for depreciation purposes. BMT Tax Depreciation often works alongside your accountant to provide the tax depreciation schedule for your property.
How can I claim depreciation on my rental property?
The easiest and best way to claim depreciation on your rental property is to get a tax depreciation schedule prepared for the property.
BMT Tax Depreciation specialise in maximising depreciation deductions for property investors, having completed 650,000 tax depreciation schedules for residential and commercial properties Australia wide.
In FY 2018/19, BMT found residential clients an average first year claim of almost $9,000.
A BMT Tax Depreciation Schedule last up to forty years and has a one-off, 100 per cent tax deductible fee.
If you’re interested in learning more about depreciation and the deductions you’re entitled to claim for your rental property , Request A Quote or contact one of our expert staff on 1300 728 726.
The one thing no-one ever tells you is that when you come to sell the property all the depreciation you have claimed affects the CGT and will increase the capital gain which is taxed. We found this out the hard way:
“All of the depreciation that you claim over the years affects the actual capital gain on the property and also the capital gains tax you will pay. Depreciation does not offset the gain; it can actually increase the amount of capital gains realized on the sale of property.”
Hi Neil,
Thanks for your comment.
Depreciation can impact a property’s cost base and therefore can affect CGT. However, it’s important to keep in mind the 50 per cent CGT discount that is available for investors that own an asset for 12 months or more.
You can find out more about the available CGT discounts and exemptions here: https://www.bmtqs.com.au/bmt-insider/when-do-you-pay-capital-gains-tax-on-investment-property/
For any further information on CGT, we recommend seeking advice from your accountant.
Thanks,
The BMT Team
We have already used your services, for a rental property in Pt lincoln … now we have put a deposit for an apartment at grange 8 mths ago will be finish build app dec 2020 .. hope to rent out at least 30 wks of year & bit concerned with the recent turmoil .. what app would our benefits be for tax fior approx first 5 years ..as apparently there is an “out” paragraph to consider
Hi Julie,
Thanks for your comment.
There are many depreciation deductions available for new properties, even when they are only available for rent for part of the year.
Please contact our team on 1300 728 726 for a quote and obligation-free estimate over the phone.
We also shared some information on the benefits of building a new investment property here: https://www.bmtqs.com.au/bmt-insider/building-an-investment-property/
Thanks,
The BMT Team
Hi I have a 1970s rental property I am doing some minor renovations on that will be ready for rent in the coming few weeks.
I am not sure if it would be beneficial for me to do a tax depreciation schedule.
Do you think I will save any $$.
Thank you.
Jon.
Hi Jonathan,
Thanks for your comment.
There could certainly be some worthwhile depreciation deductions available from your renovations. We often find many depreciation deductions for older properties.
Please contact our team on 1300 728 726 for a quote and an obligation-free estimate of available depreciation deductions.
Thanks,
The BMT Team
If I purchased a rental property in 2016 that was built in 1995 and I invest in the depreciation schedule am I able to Claim the depreciation backdated to when I purchased the property or can I only claim from the current financial year
Appreciate your advice
Hi Mark,
Thanks for your comment.
Yes, a BMT Tax Depreciation Schedule allows you to adjust previous tax returns and claim depreciation from when you first owned the property.
Please contact our team on 1300 728 726 for a quote and an obligation-free estimate.
Thanks,
The BMT Team
Hi BMT,
I have used your services for one of my properties and have been very satisfied with the report that you prvided me.
We finished building one of our properties in the current FY, which was rented as soon as the buiding was finished and another 80’s property which was previously our PPR was also rented in the current FY. While i understand that there will be significant depreciation for the brand new property, will there be aby benefit in getting the depreciation schedule for the 80’s property as well?
And finally, with the Covid-19 restrictions, how do you guys intend to do the property inspections?
Hi Nitin,
Thanks for your comment.
We often find many depreciation deductions for older properties. You could claim any capital works deductions for eligible structural and fixed items. Plant and equipment deductions could also be available for any new fixtures and fittings you installed once the property was used as an investment. The best way to find out if a Tax Depreciation Schedule would be beneficial is to contact our team for an obligation-free estimate.
We have always believed that having a thorough site inspection is essential to achieve the highest possible deductions, while maintaining full ATO compliance. We want to assure you that we take every precaution to ensure the health, safety and wellbeing of our clients and staff during our site inspections. Find out more here https://www.bmtqs.com.au/bmt-insider/site-inspections-vital-for-depreciation-schedules/
If you have any questions, you can contact us on 1300 728 726.
Thanks,
The BMT Team
BMT did a depreciation schedule for me in 2015. I am now selling the property and like others I have been surprised by the fact that the depreciation i have claimed has reduced the cost base. My question is as follows. The depreciation schedule is made up of Pooled Plant/Division 40/Division 43. Which one of those has to be deducted from the cost base or is it all of them?
Thanks
Hi Wendy,
Thanks for your comment.
This is a complex area and only your accountant can advise on what can reduce your property’s cost base. They can also discuss CGT discounts and exemptions that may also apply to you.
Thanks,
The BMT Team
Hi,
Am I correct in saying that if I purchased a house in 2018 and lived in it for a year before renting it out at the beginning of 2020, I am only able to claim the depreciation for things I buy new and put in the rental property (eg, dishwasher)? I can’t claim depreciation for anything that was already in the house like carpets and blinds?
Thanks Amy
Hi Amy,
Thanks for your comment.
Yes, you will only be able to claim depreciation on any new plant and equipment assets you purchased for the property once it was available for rent.
However, you can still claim depreciation on all eligible capital works. For example, the structural element of the property such as the walls and windows. On average, capital works deductions make up 85 to 90 per cent of total depreciation claims.
If you’d like to get an obligation-free estimate of the likely deductions on your property, please call us on 1300 728 726.
Thanks,
The BMT Team
Hi.
If I buy a 9 months old unit directly from the builder, which was never sold before, but it has been rented, will I be able to claim depreciation on plant and equipment assets?
Thank you in advance.
Hi Ross,
Thanks for your comment.
If the builder rented out the unit prior to the sale, you may not be able to claim the previously used plant and equipment assets. Generally, you need to take ownership within 6 months of it becoming new residential premises and no longer trading stock of the builder.
However, you can still claim any new assets, plus all eligible capital works deductions. We find that capital works make up on average 85 to 90 per cent of depreciation claims.
Thanks,
The BMT Team
I have just purchased a small rental property with some savings I had accumulated. The income I derive from the investment property is no more than $18,000 per annum (before any tax offsets) I have no other taxable income (I am in pension drawdown) I can’t therefore see the point of claiming capital works depreciation in my particular case because a) I have no tax to pay at the end of the year and b) claiming capital works depreciation now would simply reduce my cost base when I finally come to sell my investment property. Am I missing anything obvious?
Hi Nonetta,
Thanks for your comment.
Based on this information, there would likely be no financial benefit to claiming depreciation on your rental property.
Given we don’t know your full circumstances, it would be best to seek further guidance from your accountant or financial planner.
Thanks,
The BMT Team