More important than ever to claim depreciation

The COVID-19 pandemic is placing financial strain on many property investors across the country, making it more important than ever for investors to do all they can to maximise their cash flow. 

Property depreciation can help all investors unlock hidden cash flow from their investment properties. Depreciation is a non-cash deduction, meaning that investors don’t need to spend money to be eligible to claim it. 

If you have not yet claimed depreciation on your investment property, here is what you need to know: 

What is property depreciation? 

Depreciation is the natural wear and tear of a building and its assets over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation as a tax deduction. Depreciation can be claimed under two categories – capital works and plant and equipment. 

What are capital works deductions? 

Capital works deductions relate to claims for the wear and tear that occurs to the structure of a building and any fixed items like the walls, doors and driveways. 

Owners of residential investment properties that commenced construction after September 15, 1987, can claim capital works deductions at a rate of 2.5 per cent for forty years.

If your investment property was constructed before this date, you should still enquire to see what depreciation deductions are available as often these buildings have undergone some form of renovation which can result in capital works deductions.

What are plant and equipment deductions? 

Plant and equipment assets refer to a property’s easily removable fixtures and fittings like carpet, blinds and hot water systems. Depreciation deductions for these assets are calculated based on their individual effective life set by the ATO. 

Depreciation for plant and equipment assets was affected by 2017 legislation amendments. Under the current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on May 9, 2017, cannot claim deductions for previously used plant and equipment assets. Owners of second-hand properties can still claim depreciation for any brand new assets installed in the property once it’s income producing. 

Can I claim depreciation from previous years?

Research shows that an average of 80 per cent of investors fail to claim full depreciation deductions. 

If you have owned an investment property for a number of years and haven’t claimed depreciation, you could be missing out on thousands of dollars. A BMT Tax Depreciation Schedule allows you to adjust previous tax returns to ensure that you claim every dollar you’re entitled to.

What happens if I renovate my investment property?

If you renovate your investment property, it’s important to organise a tax depreciation schedule. When you renovate, you can claim any unclaimed deductions for eligible assets in the year of removal through a process called scrapping. 

It’s important to note that if you live in the property while renovating, any newly installed plant and equipment assets will be classed as second-hand and cannot be claimed.