If you are a property investor, it is plausible to claim your rental property depreciation against your income.
While Australia has seen substantial property price growth, it is the land that does most of the heavy lifting. Contrarily, dwellings also tend to depreciate over time, so the ATO (Australian Taxation Office) lets investors claim a tax deduction for the loss of value on their taxable income every financial year.
About Rental Property Depreciation
This type of depreciation is for property investors looking to claim different depreciating items on their property against their cumulative income. Quite a few investors are uninformed about the depreciation allowance they can claim on their rental property.
Typically, there are two types of allowances you can claim.
A. Depreciation On Assets
It implies the items within the property such as air-conditioners, oven, curtains, carpets and more. According to ATO, “depreciation assets are those that has a limited effective life.” On their website, you can quickly get a list of all assets that you can claim.
B. Capital Works
It includes the cost of constructing the building itself, including garage, materials, brickwork, driveways and more. According to ATO, this depreciation is spread over forty years before it needs replacing.
Based on your property type, the amount will vary. For instance, its age and other factors are put into consideration. You can use the depreciation calculator online to get an estimate of how much you can claim.
How To Claim A Depreciation On Rental Property?
If you have a loan on a rental property, there is an easy way you can increase your return and improve your cash flow. It is called a property depreciation report. To claim depreciation on investment property, you will also need a tax depreciation schedule.
What Is A Tax Depreciation Schedule?
It is a complete report generally prepared by a specialist Quantity Surveyor that describes all depreciation deductions eligible for a claim on a residential investment property. The quantity surveyor will classify the depreciating assets from the capital works because the two have different depreciation rates.
You can claim depreciation in two ways:
1. Diminishing Value
It offers you higher claims for the first few years of the item’s life and small claims later.
2. Prime Cost
Over the item’s effective life, it provides you equal tax deduction each year.
One is not significantly better than the other. Still, many investors consider diminishing value as they can claim higher amounts earlier on, which could prove profitable if one should sell a few years after buying or building.
