One of the great things about owning an investment property is that you can take advantage of some significant tax benefits.
There are many items that can be claimed as a standard tax deduction, such as interest repayments, insurances, council rates and property management fees.
Claiming these kinds of expenses is straight-forward; you simply claim the full amount in the year the expense occurred. This includes ongoing or pre-paid expenses.
However, there is another significant tax deduction related to investment properties that is often overlooked, called property depreciation.
Depreciation is the natural wear and tear of a property and its assets over time. While every type of property depreciates, only owners of income-producing properties can claim depreciation as a tax deduction.
Depreciation is different to other expenses in that it can only be claimed on the property’s structure and assets over several years.
If the amount you can claim from depreciation spans over such a long time, how are you meant to know how much it can reduce your tax liabilities now? The answer is understanding depreciation rates that determine your depreciation deductions.
- What is a depreciation rate?
- Set rate of capital works deductions
- Various rates for plant and equipment assets
- Finding depreciation rates with BMT Rate Finder
What is a depreciation rate?
To understand what a rental property depreciation rate is, a good starting point is knowing the principle behind them.
The structure of the property and fixed assets are depreciated using capital works deductions. Meanwhile, the mechanical and easily removable assets are classified as plant and equipment and depreciate based on a unique effective life.
Effective lives which determine depreciation rates are set by the Australian Taxation Office (ATO). The rates vary because a property’s assets are diverse. The structure and different plant and equipment assets depreciate over different timeframes.
For example, you would expect an internal structural wall to wear out slowly and at a much lower rate compared to a washing machine.
Set rate of capital works deductions
Structural walls, doors, windows, roofing, tiles, driveways and other assets that are fixed to the structure are claimed as capital works deductions.
Assets that qualify for capital works deductions depreciate over a forty-year period for residential property. This means the depreciation rates for all these assets and structures are set at 2.5 per cent (2.5 per cent x 40 = 100 per cent).
On average, capital works make up 85 to 90 per cent of depreciation claims. When you consider what is included, from foundational structure to bedroom doors, the deductions stack up quickly.
Various rates for plant and equipment assets
Understanding the amount you can claim from a plant and equipment asset is slightly more complex. There is no ‘set’ rate, instead each asset holds a unique effective life, which determines the rate of depreciation. You also have a choice of the method of depreciation.
You can either use the prime cost (PC) method that depreciates the asset at a uniform rate over its effective life. The second option is the diminishing value (DV) method that determines deductions at an accelerated rate based on its effective life. When the diminishing value method is used, the deduction is calculated as a percentage of the asset’s depreciable balance.
The table below shows just some common plant and equipment assets found in residential investment properties, their effective lives and rates of depreciation.
Finding plant and equipment depreciation rates with BMT Rate Finder
It is impossible to know the effective life of each depreciable plant and equipment asset purely from memory. This is where BMT’s innovative Rate Finder tool makes the process easy.
With just a few clicks of a button, you can find the effective life, prime cost and diminishing value method of all residential and commercial plant and equipment asset categories. BMT Rate Finder is available online and as an app so you can have this information at your fingertips.
To learn more about BMT and the additional complimentary services they offer, Request a Quote or call the team on 1300 728 726.
Learn more about the effective lives of assets: