Depreciation on Investment Properties

If you own an investment property then the Australian Taxation Office (ATO) will usually allow you to claim a tax deduction for depreciation.

Depreciation is an accounting and taxation term that describes the decline in value of an asset due to its usage or consumption. This is commonly referred to as general wear and tear of an asset and common examples include the carpet wearing, furniture becoming dated due to obsolescence or the passage of time (also referred to as the ‘useful life’).

Whether or not you can claim a tax deduction depends on the nature and age of the asset being depreciated. The amount of the depreciation you can claim depends on the depreciation method you choose to adopt for income tax purposes and the asset’s expected life span.

Depending on the asset’s age, there are two options available for claiming a tax deduction for depreciation on your property investment.

1. Buildings & Foundations

As you’d expect, the actual building suffers wear and tear and generally qualifies for a tax deduction under the capital works provisions of the income tax law. Capital works is a specific taxation term that covers the cost of various constructions, extensions, alterations and improvements of a structural nature.

The tax laws relating to this topic area are quite complex. It’s not as simple as buying a pre-existing house and then claiming a capital works deduction. Given the tricky nature, you’ll need to ask an accountant for more specific information for your circumstances.  If you do qualify for a deduction, then generally the rate is 2.5% per annum (so the building is fully written off after 40 years).

2. Other Depreciating Assets

Assets relating to your property investment (other than those that relate to the structure of the building) that have a finite life and decline in value due to use in producing rental income, can generally be depreciated over their useful life (which usually is not more than 10 years).

For example, an investor may claim a tax deduction for the decline in value of fixtures and fittings such as carpet, appliances (fridge, stove etc), light fittings, furniture and the like which produce rental income.

These items can be deducted by either of the following methods:

a. Prime Cost

This method assumes that the asset experiences even wear and tear over its useful life and accordingly a constant deduction can be claimed.

b. Diminishing Value

This method assumes that an asset wears more in its earlier years of use and accordingly permits higher depreciation deductions to be claimed by the investor in the initial years of the asset’s life rather than in later years.

You can find out more information regarding depreciation for tax purposes and applicable rates at the following website: http://www.ato.gov.au/content/downloads/NAT1729-06.pdf.