Do depreciation deductions apply to you?

Owners of income producing properties are eligible to claim tax deductions for a number of expenses involved in holding a property.

Most investors are aware of some of the deductions they are entitled to; for example, they know they can claim their Property Manager’s fees, council rates and any repairs and maintenance costs. However, all too often investors are unaware of property depreciation and as such they frequently miss out on the valuable returns these deductions can provide them with when they complete their annual income tax returns.

To help investors maximise the deductions they can claim from an investment property in the lead up to tax time, let’s take a look at some key points to help you understand depreciation.

What is depreciation?

Over time, any building and the assets contained within it will experience wear and tear. Legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation. Unlike other expenses involved in holding a property, such as repairs and maintenance for instance, an investor does not need to spend any money to be eligible to claim it. For this reason, depreciation is often described as a non-cash deduction.

Types of depreciation deductions available:

The Australian Taxation Office (ATO) clearly defines two types of depreciation allowances available for property investors:

  • Division 43 capital works allowance
  • Division 40 plant and equipment depreciation

The capital works allowance refers to what an investor can claim for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.

Plant and equipment depreciation refers to the deductions an investor can claim for the wear and tear that occurs to the easily removable fixtures and fittings found within the property.

There are more than 6,000 different assets recognised by the ATO which an investor can claim depreciation deductions for. Some examples include the carpets, blinds, air conditioners, hot water systems, smoke alarms and ceiling fans.

How will depreciation help you as an investor?

The additional funds an investor receives by claiming depreciation can have a significant impact on their available cash flow. On average, an investor can claim between $5,000 and $10,000 in depreciation deductions in the first financial year.

DanielIf you would like to know more on depreciation deductions and what you may be eligible for give us a call to speak to Daniel King on 03 5443 0344.