Have you encountered someone who invested in an older property, only to see them pass up on claiming depreciation because they believed it exclusively applied to brand new properties? Or have you witnessed an investor tangled up in the web of different depreciation rates, trying to decide which to choose from?
Perhaps you need some help in figuring out how to benefit from depreciation.
Research shows that up to 80% of investors don’t claim depreciation and miss out on significant tax benefits simply due to confusion or misconceptions surrounding rental property depreciation rates—especially regarding older properties.
In this guide, we’ll explain the concept of depreciation, explain how to claim it, delve into its application for older properties, and clarify the various depreciation rates available for Australian rental property investors.
Understanding Rental Property Depreciation
Rental property depreciation is a complex process that can be challenging to navigate, but it’s essential to understand how it works to maximise your tax benefits. Depreciation is a tax deduction that allows you to claim the decrease in value of your rental property over time. This can include the building itself, as well as any assets or improvements made to the property.
To claim depreciation on your rental property, you’ll need to determine the property’s depreciable value. This is typically the purchase price of the property, minus the value of the land. You’ll also need to determine the property’s effective life, which is the number of years it’s expected to remain in use.
There are two main types of depreciation deductions for rental properties: capital works and plant and equipment. Capital works deductions cover the structural elements of the building, such as construction costs, walls, roof, doors, and windows. Plant and equipment deductions cover assets like carpets, appliances, and blinds that have a limited effective life.
Understanding these distinctions is crucial for property investors looking to claim depreciation and reduce their taxable income. By accurately assessing the depreciable value and effective life of your rental property, you can ensure you’re taking full advantage of the available tax benefits.
How Do You Calculate Investment Property Depreciation Rates?
Depreciation rates for rental properties in Australia are determined by the Australian Taxation Office (ATO) and are split into two main categories:
Many investors utilise the diminishing value method to maximise their tax savings on depreciating assets, as it allows for a greater deduction in the earlier years of an asset’s life compared to the prime cost method.
Plant and Equipment (Division 40)
This category covers items within the rental property business that are easily removable or subject to wear and tear, such as carpets, appliances, and blinds. Each item has its own effective life as determined by the ATO, which dictates how quickly it can be depreciated.
For example, if you have a rental property with a built-in air conditioning system, you can claim depreciation on the cost of the system over its effective life.
Capital Works
This applies to the building structure and any permanent fixtures in a residential rental property, such as walls, roofs, and doors. The ATO allows property owners to claim a deduction of 2.5% per year for 40 years on buildings constructed after 15 September 1987.
This also applies to structural renovations carried out after this date, regardless of the property’s original construction year.
When calculating capital works depreciation, you must consider the property’s age. For example:
- For residential properties built between 18 July 1985 and 15 September 1987, the rental property depreciation rate is 4%.
- For any properties built after 15 September 1987, the depreciation rate is 2.5%.
Can You Claim Depreciation Deductions on Older Properties?
You can claim tax deductions for depreciation on older rental properties, particularly for the structural component or capital works. In fact, you can claim capital works deductions for up to 40 years from the date of construction for properties built after 15 September 1987.
For example, if your rental property was built in 1998, you can claim depreciation until 2038 (since the 40-year period began in 1998). However, claiming depreciation on plant and equipment for older properties can be more complicated due to changes in legislation that took effect on 9 May 2017.
Investors who acquired a rental property before 9 May 2017 can continue to claim depreciation for both plant and equipment assets and capital works deductions as they did before.
As for rental properties acquired on or after 9 May 2017, investors can only claim depreciation for plant and equipment assets if they directly purchased and installed brand-new assets from a retailer themselves. If these assets were already in the property when acquired, no depreciation can be claimed for them. However, capital works deductions remain unaffected.
Case Study: Shelly’s Rental Property Depreciation Journey
The best way to demonstrate how much you can save by claiming depreciation deductions for your rental property—even an older one—is through a scenario.
Meet Shelly. Shelly bought a brand-new property in 2013 for $500,000 and decided to rent it out in 2022. The property generated a yearly rental income of $21,320 (weekly rent of $410). Her rental expenses totaled $24,902 (interest repayments, management fees, rates, etc.).
Since Shelly started renting out her property after the 2017 rule changes regarding plant and equipment (Division 40), she could not claim depreciation on existing plant and equipment assets. However, she could still claim capital works (Division 43) deductions.
Based on her depreciation schedule, Shelly was eligible to claim $6,900 in depreciation for the capital works during her first year of using the property as an investment.
Let’s take a look at how much that would have saved her compared to if she hadn’t ordered a tax depreciation schedule:
| Without Depreciation Claim | With Depreciation Claim ($6,900) |
| Annual Income: $21,320 | Annual Income: $21,320 |
| Annual Expenses: $24,902 | Annual Expenses: $24,902 |
| Pre-tax Net Loss: -$3,582 | Pre-tax Net Loss: -$10,482 |
| Tax Refund (37% rate): $1,325 | Tax Refund (37% rate): $3,878 |
| Weekly Loss: -$43 | Weekly Income: $6 |
Without claiming depreciation deductions on her capital works ($6,900), Shelly faced a weekly out-of-pocket expense of $43. By claiming those deductions through her tax schedule, she turned that loss into a weekly income of $6—a difference of $49 per week/$2,553 per year.
The best part about Shelly’s depreciation schedule is its long-term validity—up to 40 years. As long as she continues to own and rent the property, Shelly can keep enjoying these savings until 2053.
What If I Renovated a Property Built Before 1985?
If you recently purchased a residential property originally built before 1985, you will not be eligible to claim capital works deductions unless renovations were carried out after 27 February 1992.
Properties constructed between 15 September 1987 and 18 July 1985 have certain restrictions, but they allow capital works deductions if renovations were completed after 1992.
If you renovated an older property in 2022, you could begin claiming capital works deductions from that completion date for improvements such as new kitchens or bathrooms.
Case Study: John’s Renovated Apartment
To better understand how this works, let’s take a look at John’s situation.
John purchased an old apartment built in 1980 for $395,000. He carried out minor renovations focusing on bathrooms and kitchen upgrades but did not install new appliances. His renovations only qualified for capital works deductions.
According to his tax depreciation schedule, John could claim $1,800 in capital works depreciation during his first year.
Without claiming this deduction, his property would have operated at a loss of $434, but by claiming it, he saved $624, turning his investment into an annual profit of $232.
How Far Back Can You Claim Depreciation on a Rental Property?
If you’ve missed out on claiming past depreciation benefits for your rental property—don’t worry! The ATO allows investors to amend their tax returns up to two years back to include previously unclaimed deductions.
You must do the following to do so:
- Consult a qualified quantity surveyor who will prepare a comprehensive schedule outlining missed claims.
- Work with your tax professional to submit amendments covering those periods.
How Do You Know What Depreciation Rates Apply?
To determine which rates apply specifically to your investment property, you need to reach out to a qualified quantity surveyor who specialises in estimating construction costs. That’s because they can provide a detailed schedule outlining applicable rates under Division 43 (capital works) as well as Division 40 (plant & equipment).
Contact Duo Tax today to get started on your personalised depreciation schedule and maximise the deductions available for your investment. You can also use our FREE rental property depreciation calculator to estimate how much you can save.
Maximising Depreciation Deductions
To maximise your depreciation deductions, it’s essential to keep accurate records of your rental property expenses. This includes receipts for any purchases or improvements made to the property, as well as records of any rental income earned.
One way to maximise your depreciation deductions is to use the prime cost method. This method allows you to claim the full cost of an asset in the year it’s purchased, rather than spreading it out over several years. However, this method can be more complex to use, and it’s recommended that you consult with a tax professional to ensure you’re using it correctly.
Another way to maximise your depreciation deductions is to claim capital works deductions. These deductions can be claimed for up to 40 years from the date of construction for properties built after 1987. You can also claim depreciation on renovations made to properties built before 1987.
It’s also important to note that you can claim depreciation on brand new properties, as well as on new assets purchased or renovated immediately prior to sale. However, if a property is used (over 6 months old), only the building can be depreciated at 2.5%.
To ensure you’re maximising your depreciation deductions, it’s recommended that you work with a qualified quantity surveyor. They can help you determine the depreciable value of your rental property and ensure you’re claiming the correct amount of depreciation each year.
By understanding rental property depreciation and maximising your depreciation deductions, you can reduce your taxable income and increase your cash flow. This can be a valuable strategy for property investors, especially those with multiple rental properties.
Key Takeaways
- Investors can benefit from tax depreciation even on older properties.
- Deductions apply not only to structural components but also to renovations.
- Legislation changes from 2017 limit claims on pre-existing assets in second-hand properties unless the investor installed new plant and equipment.
- Depreciation on plant and equipment varies based on each asset’s effective life.
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Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.
