You may not think of houses as depreciating in value – after all, don’t house prices keep going up and up? But property investors know that houses and apartments experience wear and tear over time, which requires upkeep and maintenance. While this can eat into the rental yield from an investment property, the depreciation costs can often be claimed as an expense on your taxes.
What is property depreciation?
As a property ages and experiences wear and tear, its value can decline over time. This depreciation can be claimed on your taxes, including both the decline in the value of the building structure, as well as ‘plant and equipment’ assets that help make up the property, such as appliances, carpets and curtains.
Property depreciation contributes to determining whether your investment property is negatively geared or not. Negative gearing occurs when you’re effectively making a loss on your investment property, after deducting the property’s expenses (e.g. interest, maintenance, insurance, council rates, fees, charges etc.) from its rental income. This can effectively lower your taxable income, which can have tax benefits in certain circumstances.
How do I calculate depreciation on my investment property?
It’s possible to estimate part of your investment property’s depreciation yourself. According to the ATO, you can often claim 2.5% of a property’s construction cost every year for 40 years from the date it was built. For example, an investment property that cost $200,000 to build in 2003 could provide up to $5000 in deductions from depreciation of its capital works every year until 2043.
If you don’t already know the construction cost or the build date for your investment property, a free property report may be able to help fill in some of these gaps, so you can make a general estimate how much you may be able to claim and for how many years.
However, a general estimate like this should not be relied upon for completing your tax return. You’ll likely need to get some professional help from a quantity surveyor or other independent qualified person to provide an accurate estimate.
Your quantity surveyor will inspect your property and prepare a depreciation schedule, summarising the decline in value of both the property’s structure and its assets, such as air conditioners, carpets, and appliances. This schedule can be sent to your tax accountant, who can add it to your tax return.
While a quantity surveyor will charge you a fee for their services, this can also be claimed on tax in the future, much like the cost of hiring an accountant.
Because tax law is complex and may be regularly updated, it’s best to check with the ATO and/or a tax accountant for advice about your taxes in relation to your financial situation and personal goals.