Become Depreciation Wise

While many property investors consider location, purchase price and vacancy rates when contemplating an investment property, depreciation is often overlooked. Depreciation can help unlock the cashflow potential within an investment property, often resulting in thousands of additional dollars for the investor each financial year.

The following factors will help property investors understand how property depreciation can change their cashflow position:

The age of the property

While new and old residential investment properties have substantial depreciable value, it’s important to be aware of current depreciation legislation.

According to legislation introduced in 2017, investors are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties.

This legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective.

Regardless of the 2017 legislation changes, BMT Tax Depreciation found residential clients an average of almost $9,000 in first-year tax deductions in the FY 2018-19.

The type of property

Investors who own units, townhouses or duplexes that are part of a strata title may be entitled to claim additional deductions for common property. Common property assets include items like air conditioners, fire safety equipment, lifts, lights and garbage bins.

All strata title properties contain different assets and have unique ownership arrangements, so it’s important the depreciation deductions get apportioned correctly.

An investor’s entitlement to shared assets within strata property is calculated based on their percentage of ownership. Your depreciation specialist can review the property’s entitlements within the Strata Plan, Building Unit Plans and Plan of Subdivision to determine the exact percentage of ownership. This allows every depreciation deduction to be claimed and maximised for the correct portion of common property.  

Plant and equipment assets

Plant and equipment assets refer to the easily removable fixtures and fittings found within an investment property. There are more than 6,000 different depreciable assets recognised by the Australian Taxation Office for investors to claim.

It’s important for investors to consider the type of assets within their property as variations in effective life and diminishing value (DV) rates can alter the depreciation deductions available.

Flooring: Carpet has an effective life of eight years and a DV rate of 25 per cent. If a landlord installs carpet worth $4,000, they will be eligible to claim $1,000 in depreciation deductions in the first full financial year. However, if they install floating floorboards or tiles of the same value, the available deductions will be $533 and $100 respectively.

Window covers: Blinds have an effective life of ten years and a DV rate of 20 per cent. If a landlord purchases blinds worth $3,000, they will be eligible to claim $600 in depreciation deductions in the first full year. If they install curtains of the same value, the first-year claim would increase to almost $1,000. On the other hand, if the landlord decides to purchase plantation shutters, which have an effective life of forty years and a DV rate of 2.5 per cent, the first-year deduction would be just $75. 

It’s important to note that blinds and curtains may be eligible for low-value pooling. Low-value pooling is a method of depreciating plant and equipment assets which have a value of less than $1,000. Any plant and equipment assets with a value of less than $1,000 can be included in a low-value pool and written off at an accelerated rate to maximise deductions. Items can be depreciated at 18.75 per cent in the first year and 37.5 per cent each year thereafter.

Lighting: Light shades have an effective life of five years and a DV rate of 40 per cent, while downlights have an effective life of forty years and a DV rate of 2.5 per cent. If the landlord installs $750 worth of light shades, they will be eligible to claim $300 in the first full year.

Let’s compare this to a scenario where an investor decides to install downlights. An investor will typically need to install more downlights than light shades. For this reason, the investor purchases $1,800 worth of downlights. Based on the effective life and DV rate, the investor would only be able to claim $45 in depreciation in the first full year. Lighting may also apply for low-value pooling.

A tax depreciation schedule is the best way to ensure the biggest tax refund possible and is 100 per cent tax deductible.