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?
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 over 800,000 tax depreciation schedules for residential and commercial properties Australia wide.
In FY 2022/23, 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.