Investment property depreciation can be a powerful tool for property investors, yet it’s often misunderstood or overlooked. For both potential and existing home loan customers, understanding how depreciation works could mean significant tax savings and improved cash flow. Here’s everything you need to know to make the most of this benefit.
What Is Investment Property Depreciation?
Depreciation is the reduction in value of an asset over time due to wear and tear. For investment properties, the Australian Taxation Office (ATO) allows investors to claim this as a tax deduction, even though the property is likely increasing in market value.
Depreciation falls into two main categories:
- Capital Works Depreciation (Division 43):
This relates to the building’s structure and fixed items, such as walls, floors, and roofs. Generally, properties built after July 1985 are eligible, and deductions can last up to 40 years from the construction date. - Plant and Equipment Depreciation (Division 40):
This applies to removable or mechanical assets within the property, such as carpets, ovens, and air conditioners.
How Does Depreciation Affect Your Investment?
Claiming depreciation reduces your taxable income, which can lead to significant tax savings. This additional cash flow can help cover expenses like home loan repayments or property maintenance, making your investment more financially sustainable.
For example, if your investment property generates $20,000 in rental income annually and you have $5,000 worth of depreciation deductions, your taxable income decreases to $15,000. This reduction can lower your tax liability, allowing you to keep more money in your pocket.
Who Can Claim Depreciation?
To claim depreciation, you must own an income-producing property. While all properties are eligible for some deductions, those built after 1985 tend to provide more substantial benefits due to eligibility for capital works deductions.
It’s essential to engage a qualified quantity surveyor to prepare a depreciation schedule for your property. This report outlines all the assets you can claim and ensures you maximise your entitlements while staying compliant with ATO rules.
How Does Depreciation Impact Borrowing Capacity?
Understanding and claiming depreciation not only improves your cash flow but can also enhance your borrowing capacity. Lenders often assess your income and expenses when determining your ability to service a loan. By reducing your taxable income and increasing your available cash flow, depreciation can improve your financial standing in the eyes of lenders.
What Recent Changes Should You Be Aware Of?
In 2017, the ATO introduced significant changes to plant and equipment depreciation for second-hand properties. Investors can no longer claim depreciation on previously used plant and equipment assets. However, capital works deductions remain unaffected.
If you purchased a property after May 9, 2017, it’s vital to work with a professional to understand how these changes affect your specific situation.
Tips for Maximising Depreciation Benefits
- Get a Professional Schedule: A depreciation schedule prepared by a qualified quantity surveyor is your best tool for claiming all eligible deductions.
- Maintain Good Records: Keep detailed records of property expenses, upgrades, and renovations. These can affect your depreciation claims.
- Review Your Schedule Regularly: If you make improvements to the property, update your schedule to reflect the new assets or renovations.
- Consult with Tax Professionals: Work with a tax accountant familiar with property investment to ensure you’re claiming correctly and optimally.
The Bottom Line
Investment property depreciation can be a game-changer for investors, providing tax savings that improve cash flow and make property ownership more affordable. By understanding how depreciation works and seeking professional advice, you can maximise your financial benefits and even strengthen your position for securing home loans.
Whether you’re a seasoned investor or just starting out, LJ Hooker Home Loans is here to help. Our lending specialists can guide you on how depreciation might impact your investment strategy and borrowing potential. Get in touch today to learn more!
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.