Depreciation is a crucial element of your investment property strategy. While depreciation tax breaks are higher on newer properties, they’re available for all investment properties. The Successful Investor’s Michael Sloan explains how.

Give me the main points

  • Depreciation is the estimated decrease in an asset’s value of time.
  • If your property was built after 1987, you can claim depreciation until the property is 40 years old.
  • ‘Depreciating assets’ are assets of a limited life that basically wear out (eg. carpet, curtains etc).
  • Hire a quantity surveyor to work out your depreciation schedules. It’ll save you heaps.

Our first depreciation story detailed the depreciation tax breaks investors can claim on a new investment property. But many investors miss out on tax breaks in the mistaken belief they don’t apply to older properties. They do—and here’s why.

Capital works deductions

If a property was built after 15 September 1987 you can claim depreciation for the years remaining until the property is 40 years old. How might this work?

If a property was built in, say, 1990, you can claim depreciation until 2030 (note: the deduction would be 2.5% of the cost of building in 1990, not the current cost). So if that house cost $100,000 to build in 1990, you’d be able to claim $2,500 each year until 2030, ie. 2.5% per annum.

Depreciating assets

Tax breaks on depreciating assets are available no matter how old the property is.

So carpets, curtains, bathroom fittings, dishwasher and washing machines qualify for depreciation as they age. The Australian Tax Office (ATO) lists all the items you can claim on and for how long. Dubbed The Effective Life’ , this decrees how long an item will last before it needs replacement.

For instance, a carpet’s life is 10 years, a kitchen stove lives for 12, while a rubbish bin lasts 10.

Tax breaks are claimed over the same timeframe, no matter if the property is old or new. When a quantity surveyor prepares a depreciation schedule for an older property, they put a value on each taxable item. For example, if a property’s carpet is already 20 years old, the quantity surveyor might give it a value of $1,200. This’ll give the investor a $120 tax deduction each year (though once the carpet’s written-down value falls below $300, the investor receives the remaining $300 deduction in that taxable year).

Prime Cost v Diminishing Value

You have two options if you claim this tax break—you can choose the Prime Cost Method, or the Diminishing Value Method. While the total amount of depreciation you can claim works out the same, the different methods determine when you get it.

Prime Cost Method

This gives you the same annual tax deduction for the item’s effective life.

Diminishing Value Method

Here you get higher claims in the earlier years of the item’s effective life, and smaller ones later on. Most investors opt for this as they receive higher tax breaks sooner. Your accountant will advise which method is best for you.

For more information on what you can claim, the Australian Tax Office (ATO) has a guide to what you claim on rental property expenses.

Disclaimer

The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends seek the counsel of an independent financial advisor before making any investment decision.

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