Depreciation for an older investment property

What is depreciation and how does it work?

Depreciation is accounting for the decline in the value of an asset (in this case, a residential property) over time, due to usage. Depreciation allows you as an investor to claim this wear and tear as a tax deduction. It means, you can reduce your taxable income and potentially increase your annual returns. Investment property depreciation is important because your property is generally classified as a taxable asset and this strategy helps you offset your taxable income.

Depreciation for old properties can provide valuable tax deductions. Let’s explore in detail.

Capital works deductions

This typically covers structural elements like walls, floors, and fixed assets.

Older properties built before 16 September 1987 are not eligible for capital works deductions. However, if the property has undergone substantial renovations after July 1985, these renovations may still qualify for tax deductions. Substantial renovations would usually cover the removal or replacement of the property’s foundation, supporting interior walls, staircases, roof or floors.

Only for properties built after 15 September 1987, you’ll be able to claim depreciation, opens in new window each year until it was 40 years old. For example, consider a property that originally cost $200,000 to build in 1990. Assuming a depreciation rate of 2.5%, it would be eligible for depreciation claims of $5,000 each year until 2030.

Plant and equipment

This includes removable assets and items like carpets, ovens, blinds, etc.

Deductions are only available for new assets or items purchased directly by you. Second hand plant and equipment in properties purchased after 9 May 2017, can no longer be claimed for depreciation.

It’s also worth noting that the depreciation for plant items is typically calculated based on the effective life span, opens in new window of that particular asset.

The ATO offers two methods for depreciation calculations – prime cost and diminishing value.

Depreciation schedule for investment properties

A house depreciation schedule is a detailed report that a qualified quantity surveyor prepares outlining the rate at which your assets will decline in value and the depreciation deductions that you as an investor can claim over time.

So, is it worth getting a depreciation schedule for an old house? Absolutely. In fact, you’ll need a depreciation schedule before working out how much you can claim. Always work with an accredited professional surveyor. Once you have a depreciation schedule in place, share it with your accountant, who’ll factor it in when filing your tax returns.

Claiming depreciation on renovations

If your old rental property was substantially renovated after July 1985, you may qualify for tax deductions.

Tips to maximise rental property depreciation with renovations

• Get a depreciation schedule written up before you begin renovating. It’ll help you track all the items you’re disposing and help you avoid missing out on any valuable deductions. 
• Get a depreciation schedule right after renovations. Every improvement or purchase you make is eligible for potential tax deductions. For instance, if you replace your appliances, change carpets, or re-paint – these costs can be depreciated over time. 
• Make note of the cost of items. Individual items that cost less than $300 can be written off and claimed as immediate deductions.