Australia is one of the most booming property markets in the world. So, any investment you make in properties is worthwhile. But when you buy a property, your expenses don’t stop once the whole amount is paid. Instead, the cost of owning properties adds up. For example, pay a lot for repairs, mortgage payments and management fees. So, your overall rental income from such investments goes down drastically. But there is a way to save a couple of thousands on tax every year. Yes, that is correct, Porpery Depreciation!

But how can you bring your taxes with it? More importantly, what exactly is property depreciation? Let’s find out.

What is Property Depreciation?

The value of some assets declines over a period. This decline is known as depreciation. So, calculating your taxes can bring down your tax payable as the value of the asset reduces over time. For properties, the depreciation is categorised into two parts:

1. Capital Works Depreciation

This applies to the structure of the property. You can claim 2.5% of your building’s value. But the condition? It’s applicable on properties built after 16^th September 1987.

2. Plant and Equipment Depreciation

This deprivation applies to properties with a limited lifespan. It includes carpets, curtains, kitchen appliances and more.

When you apply these depreciations, your tax payable drops. Result? You save thousands on your taxes over the years.

How Does Depreciation Work?

ATO allows you to claim depreciation on any property you purchase. The typical lifespan of such properties in 40 years. Similarly, you can also claim deductions on plant and equipment. But the lifespan of such equipment varies.

Let’s say you bought a property for $500,000. Now, the capital work value on this property is $200,000. So you can claim 2.5% of this value per year. This means you can claim a $5,000 deduction annually in terms of depreciation.

For plant and equipment, the depreciation rates totally depend on the individual item’s lifespan. For example, the lifespan of a certain kitchen equipment is 1 year. Then, you can claim depreciation for one year. 

How Depreciation Saves You Money?

Let’s say you bought an investment property. It brings you $25,000 a year as a rental income. Once you deduct your mortgage interest, management fees and maintenance costs, the final taxable income is $10,000.

But when you use depreciation, it can go down further. For example, you can claim a $5,000 deduction as capital depreciation (2.5% of your property’s value of $200,000.) On top of that, let’s say the plan and equipment depreciation on certain products is #3,000.

So, you can claim $8,000 per year in terms of depreciation. This brings down your initial taxable income from $10,000 to $8,000! That’s how you save thousands on your taxes. 

Maximizing Your Depreciation Benefits

First things first, get a depreciation schedule for your property. Only a qualified surveyor can offer you that. They will visit your property, inspect it, and identify all the available deductions. This schedule is your go-to document for calculating your tax deductions.

It doesn’t matter if your property is new or old. You can claim deductions on all properties constructed after 16^th September 1987. The best part? You can claim depreciation on new work if you renovate your property.

How to Claim Depreciation on Older Properties?

There is a common misconception among investors that older properties are not qualified for depreciation deductions. But this is wrong. If your property is constructed post-1987, it doesn’t matter if it’s old or new. You can claim depreciation. But yes, the depreciation on older property is obviously less than the depreciation on new properties.

But what about properties built before 1987? Unfortunately, you cannot claim depreciation on those properties. But if you’ve installed plants and equipment in such older premises after 1987, you can claim that deduction! This investment could be anything like water systems, blinds or updated flooring.

Similarly, if you renovate such an older property, your new work will qualify for capital work depreciation. Roof installation, new window installation, or kitchen upgrade are all covered under capital works for such older properties.

Renovations and Depreciation

Renovations, too, can be a great way to save big in your taxes. In fact, it has double benefit! With renovations, you can increase your rental income. On top of that, you can claim additional depreciation on your renovation cost. The limit for such deductions is 2.5% of the renovation cost each year.

Let’s say you spend $50,000 on a kitchen renovation. You can claim $1,250 in depreciation each year for the next 40 years. This adds up to $50,000 in total deductions over the life of the renovation.

Plant and equipment items installed during the renovation are also eligible for depreciation. For instance, new appliances, lighting, or air conditioning units can be claimed according to their effective life.

How to Get Started?

If you haven’t been claiming property depreciation, it’s not too late to start. You can amend your previous tax returns to include missed depreciation deductions. This can help you recoup thousands of dollars.

To begin, contact a qualified quantity surveyor to prepare a depreciation schedule. The cost of obtaining a schedule is tax-deductible, making it a worthwhile investment. Once you have your schedule, provide it to your accountant when lodging your tax return.

You can invest your saved tax money and can pay off your mortgage faster from the returns on those investments. Or, you can use it to purchase a new property.

Final Thoughts

Property depreciation is a powerful tool that can save you thousands of dollars each year. You can claim the declining value of your property and reduce your taxable income. This is quite a simple process if you have a qualified accountant like Nanak Accountants by your side. But a lot of people often ignore such tax deductions and end up paying a lot more on taxes.

We can arrange a quantity surveyor for you and once the survey is done, we will take care of your taxation. Remember, the tax saved is the money earned! So why let go the available depreciations? Talk to our experts today and save thousands on your taxes.