Are you maximising your tax deductions in Australia by claiming rental property depreciation on your investment properties? Thousands of Australians are missing out on legitimate tax deductions because they are unaware of their entitlement to rental property depreciation.
What is Rental Property Depreciation?
Rental Property Depreciation in layman’s terms is the reduction in value of the improvements (eg. buildings and fittings) of your rental property that you can claim as a tax deduction against your income. This does not mean that your property investment has lost value, but it takes into account that various improvements to your rental property (eg. curtains, carpets, kitchen cupboards etc) lose value over time due to various factors such as wear and tear.
Rental property depreciation represents this loss in value that can be claimed as a tax deduction against your income. You may also hear rental property depreciation referred to as a non-cash deduction, which means you do not need to spend any money in order to claim it as a tax deduction.
What Can Be Included in Rental Property Depreciation?
Rental property depreciation can be broken down into two categories – Building and Fixtures & Fittings.
Buildings (sometimes referred to as capital works allowance) are generally considered to be the permanent structures such as brickwork, concrete, roofing, tiles etc. The cost of the building can generally be depreciated over 40 years (the depreciation period) depending on the time of construction.
For example, if you built a house that cost $400,000 (excluding the cost of the land) and you depreciated it over 40 years, you would be able to claim a tax deduction of $10,000 per year (ie. $400,000 / 40 years).
Houses built prior to July 1985, are generally not eligible for depreciation, other than any improvements made after that date.
Fixtures and Fittings:
Fixtures and fittings of your rental property include items that are not generally a permanent part of the building structure. Fixtures and fittings include items such as curtains, dishwashers or furniture that is included as part of a rental lease.
The depreciation period for fixtures and fittings varies depending on what it is, but is generally intended to reflect the normal useful life of the item and will be a much shorter period than for the building (which should have a longer useful life). The relevant depreciation rates are determined by the Tax Commissioner and published on the ATO’s website.
I Didn’t Build My House, So How Can I Determine the Rental Property Depreciation?
You don’t need to have built your house to claim rental property depreciation, and you do not need to know how much the house cost to build.
The rules for determining your rental property depreciation benefits are complicated. My recommendation is to employ the services of a licenced quantity surveyor.
A licenced quantity surveyor will draw up a depreciation schedule for your property which you can then use in your annual tax return each year. In doing this, they will
- physically inspect your rental property and determine all eligible items for depreciation (ensuring you maximise your tax deductions);
- determine what parts of your rental property can be depreciated and determine a historical cost;
- apply the correct depreciation rates to each item; and
- create a depreciation schedule which will include the exact tax deduction you can claim for every year you own the property.
I have personally used Washington Brown and highly recommend them. I have negotiated a special rate for readers of this website. If you use the links in this article, or use the form that can be downloaded below, you will receive a $55 discount off the normal price for a depreciation schedule. Washington Brown operate across Australia (and also overseas), and so no matter where your property is located they should be able to support you.
As an added benefit,
- Washington Brown are extremely experienced (they have assessed more than 110,000 properties for tax depreciation across Australia), and their reports are easy to read. All you need to do is send your depreciation report to your accountant at tax time.
- The cost of employing a quantity surveyor is usually tax deductible
To obtain a quote for a depreciation schedule with the $55 discount off the normal price, use the links on this page, or complete and send the attached application form to Washington Brown to the email address on the form and they will contact you.
Update: In the May 2017 Australian Federal Budget, the Australian government announced they were changing the rules around the depreciation of plant and equipment. How this will work in practice will be subject to final legislation. We will provide an update when / if this legislation passes the Senate, or check out the latest on the budget and its implications for Aussie expats on our 2017 Australian Federal Budget page.
How Does Rental Property Depreciation and Negative Gearing Apply to Australian Expats?
The tax treatment of rental properties varies depending on whether you are an Australian resident for tax purposes or a non-resident for tax purposes. If you are an Australian resident for tax purposes your overseas investment properties may also be eligible for rental property depreciation.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies mentioned in this article.