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.
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.
As announced in the 2017 Budget, your entitlement to depreciation may depend on when you acquired the property.
For properties that were acquired before 9 May 2017 (including contracts entered into before that date), plant and equipment forming part of the property, investors can claim depreciation based on assessment by a surveyor on the residual value and remaining life of the asset.
However, for properties acquired after 9 May 2017, depreciation is only available for:
- Costs on plant and equipment that you actually paid for (e.g. new carpets or fridge); or
- Plants and equipment included as part of the new property.
Subsequent owners of the property will not be able to claim deductions for plant and equipment purchased by a previous owner of the property.
Prime Cost vs 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.
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 you seek the counsel of an independent financial advisor before making any investment decision.