The Lowdown on Property Depreciation: Do’s and Don’ts  

While property investing in Australia remains a great wealth-building strategy, navigating the world of property depreciation can be quite tricky. Because of this, many property investors miss out on massive tax savings. If you’re interested in getting maximum tax benefits out of your investment property but you’re not sure where to start, Washington Brown can help. 

As property depreciation experts, we’ll be able to give you the lowdown on what you can expect in property depreciation schedule and the most common do’s and don’ts you should know about to maximise your tax deductions and avoid any penalties. 

What Is Property Depreciation in Australia 

Simply put, depreciation is a form of tax deduction that is available to property investors. This means that if you’re a property investor, you’ll be able to claim a tax deduction for the wear and tear over time on most investment properties.  

This deduction would cover both the building structure (capital works) as well as the plant and equipment assets which can include furniture, appliances, and fixtures if the property is new. 

Since depreciation deductions can reduce investors’ taxable income significantly, it is considered a great strategy for property investment. 

To ensure you’re getting the maximum tax benefits on your investment property here are our top 8 do’s on property depreciation:  

1. Get a Professional Depreciation Schedule 

It may sound simple, but having your depreciation schedule prepared by a qualified Quantity Surveyor is one of the best investments you can make as a property owner. Not only will we be able to assist and guide you from the start of your depreciation report process, but we have the expertise and legal qualifications to help you maximise your deductions by identifying all depreciable assets on your property. 

2. Understand the Difference Between Capital Works and Plant and Equipment 

Your capital works are your structural elements such as walls, floors, roofs, and other fixed assets. These assets typically have a 40-year lifespan and attract a depreciation rate of 2.5% per annum. 

Plant and Equipment on the other hand refers to all the removable or mechanical items such as dishwashers, carpets, and blinds, and their effective lives vary. 

By understanding these differences, you can better appreciate your property’s full depreciation potential. 

3. Do Claim Depreciation on Old Properties (If Eligible) 

If you were wondering if you could claim on your old property, this is your sign that you can still claim certain types of depreciation on older properties. While capital works deductions generally apply to properties built after July 1985, you can still claim depreciation on plant and equipment if they acquired brand new. 

4. Always Keep Detailed Records 

If you’re planning on claiming depreciation on your investment property, keeping accurate and detailed records is essential. Ensure you keep receipts for any renovations, improvements, or replacements, as well as property purchase documents. This will ensure you claim all eligible deductions while complying with Australian Taxation Office (ATO) guidelines. 

5. Consider Immediate Deductions and Low-Value Pooling 

To get possible upfront tax savings, you should consider immediate deductions and low-value pooling. This means that certain assets under $300 can be written off immediately, while assets under $1,000 can be placed into a low-value pool and depreciated at an accelerated rate.  

6. Stay Updated on Legislation Changes 

To avoid penalties or any tax discrepancies, stay informed on any tax laws and regulation changes, as evidenced by amendments to depreciation rules under the 2017 legislation, which limited deductions on second-hand plant and equipment for properties acquired after May 9, 2017.   

7. Speak to An Accountant with Property Expertise 

Partnering with your tax accountant who specialises in property investment ensures that you are correctly claiming deductions, receiving up-to-date advice, and staying compliant with tax laws. 

8. Claim Renovation Costs Appropriately 

It’s important to note that when you renovate a property, scrapped items that have been removed may have residual value that can be claimed as an immediate deduction. It may be advisable to get a quantity surveyor out prior to a renovation to assess the items you are removing with a view to claiming the residual value of these items. 

Now that we’ve done a run-through on the essential ‘do’s of property depreciation to help maximise your claims, let’s shift gears and explore the common property depreciation pitfalls—the ‘don’ts’—that could cost you valuable deductions. 

1. Assume All Old Properties Have No Depreciation Benefits 

If you have an older property, don’t assume that it has no depreciation benefits. While there are some limitations, especially surrounding second-hand assets purchased after May 2017, capital works deductions may still be significant for properties constructed post-1985. 

2. DIY Your Depreciation Schedule 

While we all might be frugal from time to time, preparing your depreciation schedule should not be one of these times. Sure, it may save you money upfront, but it can lead to missed deductions and potential errors. Instead, get a professional Quantity Surveyor who has the expertise to help you maximise your returns and ensure you remain compliant. 

3. Ignore Renovation Histories of Existing Properties 

If you’re buying an established property, be mindful of its renovation history. Any renovations conducted after 1985 may still be eligible for capital works deductions, even if you weren’t the one who commissioned the work. To uncover these hidden deductions, ask for the necessary documentation or consult a Washington Brown Quantity Surveyor. 

4. Overlook Depreciation When Crunching Investment Numbers 

Depreciation is a great way to boost your cash flow by reducing taxable income. Ignoring depreciation when analysing property investments can result in undervaluing a property’s potential returns. 

5. Claim Private Use Assets as Depreciation 

You cannot claim depreciation on assets used for personal purposes! If you use part of your investment property for private use, be careful to separate private and investment use when claiming deductions. 

6. Confusing Repairs with Capital Improvements 

Understanding the difference between Repairs and capital improvements is key for accurate tax reporting and deductions. Repairs and maintenance such as fixing a broken window are deductible immediately, whereas capital improvements such as adding a new deck are depreciable over time.  

7. Wait Too Long to Have a Depreciation Schedule Prepared 

To ensure you can claim the maximum deductions from day one and potentially get a higher return in your first tax year, try to arrange a depreciation schedule soon after settlement or upon completion of renovations.  

8. Don’t Assume Depreciation Doesn’t Apply to Commercial Properties 

–And lastly, residential and commercial properties have different rules and rates for depreciation, however, both types of properties offer great tax deduction opportunities. To ensure you do not leave any money on the table speak to a qualified Washington Brown quantity surveyor to help identify all eligible claims.  

While the subject of property depreciation in Australia can be a daunting topic to navigate, using the right strategies and professional guidance, you’ll be able to optimise your tax deductions and enhance your investment returns.  

By following our comprehensive guide on the do’s and don’ts of property depreciation, you’ll be better equipped to maximise depreciation benefits while ensuring compliance with Australian tax laws and one step closer to boosting your property investment outcomes. 

Disclaimer: The information provided in this blog is general in nature and not intended to be personalized financial advice. Please consult a financial advisor before making any decisions regarding your finances.