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.
Hi, I’m wondering how much capital works depreciation is typical for an apartment? I’m looking to buy a 10 year old apartment as a rental property. Can you give me a ball park figure? Thanks.
Hi Tracey,
Thanks for your comment.
It’s difficult to provide a ballpark figure without more information.
For example, a ten-year-old unit that is 100 square metres in size could produce an annual depreciation deduction between $5,100 and $7,100 in capital works deductions.
But numerous factors can change the depreciation available. We recommend giving us a call at 1300 728 726 for an accurate estimate.
Thanks,
The BMT Team
Hi BMT team, very informative article thank you. My question relates to relocating an existing home. If I purchase an existing house and relocate it to my new block of land, would this building be treated as a substantially renovated home at the new location? Would there likely be much depreciation that get ‘reset’ due to the purchase and relocation? Thanks!
Hi Zach,
Thanks for your comment.
If the property hasn’t been substantially renovated as per the ATO’s criteria before moving, it won’t be classed as substantially renovated.
Usually, relocating a building alone doesn’t class as a substantial renovation, however you may be able to claim depreciation on the improvements needed for the relocation such as re-stumping and installing new plumbing, but not on the costs of the move itself.
There could also be further depreciation deductions available on the property depending on when it was built. For example, you can claim capital works deductions (depreciation on the building’s structure and fixed assets) for up to forty years if it was originally constructed after 1987.
Thanks,
We have been claiming the depreciation as per a BMT Report for about five years. However, we are now retired and don’t need to reduce our taxable income. As continuing to claim depreciation is of no benefit to us, and will be added to the cost base of the property when it is eventually sold, can we NOT claim depreciation in future? Thanks.
Hi Sharon,
Thanks for your comment.
Claiming depreciation is a choice and is not compulsory. This means you can ‘opt out’ of claiming it in future years.
We recommend getting in touch with your accountant as they will look at your individual scenario and provide the most accurate advice.
Thanks,
The BMT Team
Hi, I am a first home buyer and I would need to live in a unit for a year to get Grant and Stam Duty removed. Can I still claim a deduction if I rent the property after a year?thanks, G
Hi Gabby,
Thanks for your comment.
If you turn a main residence into an investment property after 1 July 2017 you can only claim deductions on the structural assets as the plant and equipment is considered previously used under legislation changes from 2017 and no longer claimable for depreciation.
Thanks,
The BMT Team
Hi,
In 2020 I bought as investment a 1 bedroom unit (built in 2009) and rent it out during the last financial year.
Can I still claim depreciation on all eligible capital works. For example, the structural element of the property such as the walls and windows?
Thanks and regards
Hi Dario,
Thanks for your comment.
Yes, you can claim depreciation on all capital works. Given that the property was built in 2009, you can claim capital works deductions until 2049.
Please get in touch with our team on 1300 728 726 and we can provide an obligation-free depreciation estimate over the phone.
Thanks,
The BMT Team