As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates. When it comes to your investment property, these items are classified as either Plant and Equipment
assets or Capital Works
The ATO allows property investors, who generate income from their investment property, to claim the property depreciation as a tax deduction.
Division 43 Deductions refer to the depreciation of the structure of the building. The structure of a residential and commercial building generally has an effective life of 40 years. In other words, you can claim the decrease in its value for a deduction for 40 years, provided that you’re generating an income from the property.
You can claim a capital works deduction on construction costs too.
The term “plant and equipment” refers to the fixtures and fittings that are found within the building and are generally easily detachable from the property.
The rate at which plant and equipment fixtures depreciate depends on the ATO’s Asset Effective Life Schedule
, which gives guidance on how many years an asset is effective before it’s worn out. The ATO recognises more than 6,000 different assets that investors can claim tax deductions on.
For example, a carpet, which is subject to a fair amount of wear and tear, has an effective life of eight years.
Claiming tax depreciation on investment properties involves identifying its value, its estimate construction costs, and its fittings and fixtures. A tax depreciation schedule is a comprehensive report that details the tax depreciation deductions you can claim on your investment property to pay less tax.
The tax depreciation schedule document is typically prepared by a professional quantity surveyor, who will inspect your investment property and assign a value to each asset.