What is Tax Depreciation?

There are a number of tax deductions that can be made on investment properties, but one type of deduction that can confuse property owners is tax depreciation. Some investors aren’t even aware of the considerable deduction that can go towards your rental property’s income.

The Australian Tax Department (ATO) recognises that as a property ages and starts to wear out it depreciates in value. Because of this, the ATO allows property investors to claim a deduction on the depreciation of investment properties.

There are two types of tax depreciation that can be claimed:

  1. Capital Works Depreciation: This is based on the historical building cost and is known as the building write-off. It is a set annual allowance and is usually 2.5% or 4% of what the building originally cost to build excluding the cost of ‘plant items’. However not all properties can claim this allowance.
  2. Depreciation on Plant: Most income producing properties are likely to be able to claim depreciation on plant, which essentially includes the removable assets of a building such as curtains, cook tops, air-conditioning and hot water systems for example. These items depreciate faster than the building and are therefore not based on the historic valuation of the building.

Overall what is being taken into consideration when tax depreciation benefit is being calculated is the type of building, its age, use and fit out. If you obtain a tax depreciation schedule from either a local quantity surveyor or tax depreciation schedule for either a local quantity surveyor or tax depreciation specialist, how much depreciation you are entitled to deduct each financial year will be laid out for you. And you can claim the cost of obtaining the tax depreciation schedule.

Tax depreciation for any investment property is most valuable for the first years of the property’s life, however can still be beneficial for older properties, so it can pay to find out what the depreciation is for your investment property.