Residential Property Depreciation

HomeResidential Property Depreciation

We pride ourselves on our extensive knowledge of depreciating residential real estate. JC Tax Depreciation provides timely depreciation reports to our customers across Australia.

Always maximising the most available deductions for our clients to save them thousands in tax, while promising to deliver exceptional customer service.

Call us Today

Depreciation Packages

Depreciation Package
PLUS

$550

plus GST
  • Quantity Surveyor Full Depreciation Reports
  • 40 Year Depreciation Report
  • Prime Cost vs Diminishing Value
  • Low Cost & Value Pooling
  • Director Sign Off
  • Photos of Property
  • Property Research/Analysis
  • RP Data
  • Emailed to you or your Accountant
  • ATO Compliant
  • On average, clients receive a return of 10 X their fee
  • We can estimate your tax return over the phone

Depreciation Package
STANDARD

$495

plus GST
  • Quantity Surveyor Full Depreciation Report
  • 40 Year Depreciation Report
  • Prime Cost vs Diminishing Value
  • Low Cost & Value Pooling
  • Director Sign Off
  • Property Research/Analysis
  • Emailed to you or your Accountant
  • ATO Compliant
  • On average, clients receive a return of 10 X their fee
  • We can estimate your tax return over the phone

What Is Property Depreciation?

Property depreciation is a tax deduction that can be applied to reduce your tax burden.

If you are a property investor who wants to deduct the loss in value of an investment property from your taxable income, you can stand to benefit from depreciation.

When it comes time to file your taxes, savvy investors will know how to take advantage of the depreciation on their residential properties.

Depreciation can undoubtedly have a large impact on the cash flow of a residential property investor. However, the extent to which it can relieve your tax burden depends on the qualified quantity surveyors you rely on.

You can deduct the depreciation of your investment property from your taxable income, in the exact same way that you can deduct wear and tear on other assets you bought to generate revenue, such as a car.

Property investors with experience are well aware of how they can use depreciation to their advantage to reduce their tax burden. In fact, some investors will take depreciation as a specific consideration, when they are making their next investment decision.

Don’t Leave Money on the Table

Because inexperienced real estate investors may not be aware of depreciation before making their next investment, often, thousands of dollars are left unclaimed each financial year.

However, knowing how to use depreciation isn’t only for the experts. 

It pays for all newer residential property investors to study how they could benefit from depreciation. Property investors only need to hire a licensed quantity surveyor to go over their property and provide a report for their accountant. 

Anyone who buys a property with the intention of using it to generate revenue is able to deduct the costs from their taxable income. This includes both the costs of the building and all of its contents.

One simple step, and you could be saving a sizeable amount from your tax burden.

Two Types of Depreciation Claims

There are two types of claims on the depreciation of residential investment properties.

Australian law permits investors to reduce their taxes by depreciating the cost of the building, and associated fixtures. This is commonly referred to as capital and plant and equipment respectively.

Capital

Division 43: Capital Works Allowance covers the value of the structure of the building. This includes assets that are thought to be permanently attached to the property.

Capital includes the driveways, roofs, ceilings, walls, bathtubs and toilets of a residential property.

To understand what may come under “capital” and what should be designated as “plant” instead, it can be useful to think of capital as items at the property that can’t be transported.

Plant & Equipment

Division 40: Plant and Equipment Depreciation takes into account the value of the removable items within the building.

Equipment and machinery that are readily portable or mechanical in nature are designated as “plant”. This includes flooring, carpets, window coverings, hot water systems, air conditioners and kitchen appliances such as ovens and dishwashers, as these are all removable.

The depreciation rates of these assets in a residential investment property are different to that of commercial property depreciation.

How Much Are the Tax Savings from Depreciation?

It all depends on how the depreciation rates are calculated for a given residential investment property.

When creating a property depreciation schedule, a variety of elements have to be taken into account. As they are unique to each property, the tax savings from depreciation can vary widely.

Depreciation is a type of non-cash deduction. Though depreciation is a way to pay less tax, you are not required to pay for it continuously. Instead, the depreciation deductions are incorporated into the cost of your property at the time of purchase. This sets it apart from other types of deductions that are continuously taken out of your wallet, such as interest charges.

How Is Depreciation Calculated?

When you buy an investment property in Australia, you are considered to have acquired the structure as well as all of the numerous individual goods within.

The ATO mandates that real estate investors note how the value is split across capital and plant of the overall asset. Your quantity surveyor will need to detail which components of the property are fixed to the structure and which are detachable, as well as sum up their combined worth.

Capital

For the capital part of the investment property, property owners are eligible to deduct at a rate of 2.5% for up to 40 years. Typically, capital works deductions account for between 85% and 90% of a claim’s total depreciation.

Plant & Equipment Assets

The depreciation for plant and equipment assets is calculated separately, according to each type of asset that fits under this category. These assets are typically depreciated using the diminishing value or prime cost approach over the course of their useful lives.

Different items will depreciate at a different rate and for a different period of time, according to their calculated effective life or claimable period. The ATO provides a list of around 6,000 products that are covered under the plant and equipment part of depreciation laws.

The most popular method of depreciation for plant and equipment assets is the diminishing value technique. It calculates depreciation as a percentage of the asset’s depreciable balance. As a result, the early years of ownership see greater depreciation deductions.

Another method to calculate plant and equipment depreciation is the prime cost approach. This calculates depreciation as a proportion of the cost. The prime cost technique produces a more consistent claim from year on year, since depreciation deductions are spaced out over time rather than being front-loaded into the earlier years of ownership.

Does Depreciation Apply to All Properties?

Property depreciation claims for investment properties fall into one of four categories:

  • - Built prior to the 18th of July 1985
  • - Built between the 18th of July 1985 and the 26th of February 1992
  • - Built before the 26th of February 1992, but renovated more recently
  • - Built after the 26th of February 1992, or an older home that’s been extensively renovated
Built before 18 Jul 1985

For these older properties where the building of the property began before this date, only plant and equipment may be depreciated.

Built from 18 Jul 1985 to 26 Feb 1992

For properties where the construction took place during this period, investors are able to claim both Building Allowance and Plant and Equipment.

For these houses, the rates of deduction for each claimable year range from 2.5 to 4 per cent.

Older, Renovated Buildings

If your property was built after 26 February 1985 but has since been renovated, it will fall into this category.

To claim depreciation, you will need to provide the cost of renovation to the ATO. If the renovations were undertaken by a prior owner, you can still claim depreciation on your property, but you will need a qualified quantity surveyor to provide an estimate of the costs of renovation.

Built after 26 Feb 1992 or Extensively Renovated

Investors can claim depreciation on the decrease in value of a depreciating item inside the property.

How Can I Obtain a Tax Depreciation Schedule?

You may need to work with qualified consultants to help you obtain a tax depreciation schedule, depending on when the building was constructed.

For properties built after the 1985 cut-off date, you will need to hire a licensed quantity surveyor.

You will need to consult with a specialist quantity surveyor, rather than relying on a tax depreciation schedule from an accountant which may not hold up to an audit by the ATO.

Property depreciation is a highly specialised field that demands a level of professional expertise.

Quantity surveyors are the professionals who are sufficiently equipped to estimate the values and costs associated with a building, when such prices are unknown. This is detailed in the ATO's Tax Ruling 97/25.

This means that other experts, such as a real estate agent, valuer, accountant or solicitor, are not permitted to estimate the building costs.

What to Look for in a Quantity Surveyor

Quantity surveyors are experts in measuring the expenses of the construction process. Only a quantity surveyor who is completely certified has the necessary education, experience, and training to produce accurate figures for a property tax depreciation plan.

Investors should verify the credentials of a quantity surveyor, to make sure they are members of an industry body such as the Australian Institute of Quantity Surveyors (AIQS). AIQS membership shows that a quantity surveyor has successfully completed the recognised qualification and is competent for a specialised, high-stakes task.

With thousands of dollars in the balance, depreciation must be calculated accurately by a consultant who understands the ins and outs of the profession.

The expert aid of a quantity surveyor can provide the difference between educated guesses or assumptions and true calculations. They can also help maximise a client's financial position with respect to their real estate assets.

Conducting an On-Site Property Inspection

On-site rental property inspections are mandated by the AIQS Code of Practice. This level of accuracy is essential to meeting the ATO criteria for calculating a depreciation schedule.

For a quantity surveyor to evaluate the rental property, they frequently communicate directly with the tenant or rental property management. Ideally, this takes place as soon as possible following a settlement, right before the renter moves in. This is done to minimise the inconvenience to the tenants.

A site inspection means that all depreciable objects are documented and photographed by a licensed quantity surveyor. In the case of an audit, the documentation can subsequently be used to support your case for depreciation.

It also helps to ensure that no possible depreciation deductions are overlooked during the process.

What Is Involved in Creating a Tax Depreciation Schedule?

The price of creating a tax depreciation plan can vary widely. A range of variables can affect how much time and money will be needed, such as the kind of residential rental property it is, where it is located, and how big the rental property is.

Assuming the quantity surveyor can visit your investment property without delay, it usually takes 3 business days to complete a depreciation plan.

Often, it pays to choose a more extensive depreciation package that offers more value for a rental property investor, especially if you own a sizable portfolio of rental properties.

Keep in mind that, as it is part of your costs of owning residential rental properties, the cost of obtaining a tax depreciation schedule is completely tax-deductible.

Filing Taxes Again with a Depreciation Schedule

It’s not too late to obtain and use a tax depreciation schedule.

For rental property investors who have only learned about the benefits of a tax depreciation schedule now, it may not be too late. It's possible to file your taxes again. Your accountant is able to make changes to tax returns from up to two years ago.

However, there are certain exceptions to this rule. So if you are in need of further information about how to back-date a tax depreciation schedule, speak with your tax advisor about what your options are.

Once you have your tax depreciation schedule, you could be reaping the dividends in the form of depreciation deductions for decades to come.

Talk with our expert team about tax depreciation Sydney, tax depreciation Melbourne or tax depreciation Brisbane, or order your property depreciation report.