Expert how-to: Cut tax and max depreciation on your investment property

If you own an investment property, you should know that depreciation can maximise your cash flow and is also the highest non-cash property tax deduction available. This means you don’t need to spend any money in order to claim it.

How does it work? It’s pretty simple. As your investment property gets older, its structure and assets (the fixtures and fittings) wear out – they depreciate. You can claim this depreciation as a tax deduction each financial year and pay less tax. But there are ways to maximise the amount of depreciation you can claim, so here are some key tips gathered from long experience in property.

Enlist a specialist quantity surveyor

Specialist quantity surveyors are one of the few professionals recognised as having the skills to estimate construction costs for depreciation purposes.

A specialist quantity surveyor will complete a tax depreciation schedule on your property following a physical site inspection. During a site inspection, a site inspector measures the building and flooring, notes down the construction type and method, workmanship, materials used and the property’s condition. They will also identify all eligible plant and equipment assets.

Both the National Tax and Accountants’ Association and Australian Institute of Quantity Surveyors recognise the importance of a site inspection for an accurate schedule. When a tax depreciation schedule is completed without an inspection, deductions are often missed, and costly errors can be made.

Your accountant then uses the tax depreciation schedule to determine your depreciation deductions each financial year.

Depreciation isn’t just for new properties

While research shows that new properties hold more depreciation deductions, don’t assume that depreciation can’t be claimed on your secondhand property. The ATO offers two main types of deductions; to the fixtures and fittings that can, in theory, be removed from the property, and to the structure itself and items that would be considered permanently fixed to the building.

Despite legislation changes in 2017, secondhand property owners can still claim depreciation on all new plant and equipment assets they purchase for the property. In plain terms, plant and equipment depreciation means wear and tear that occurs to the fixtures and fittings in your property (there are more than 6,000 different types of such ‘assets’ that the ATO recognises, ranging from carpets to ceiling fans).

This is in addition to all qualifying capital works deductions that, on average, make up 85-90 per cent of the total claim. ‘Capital works deductions‘ refers to wear and tear that happens to the structure of your property and fixed items.

Claim more on low-value items

Plant and equipment items are generally depreciable over their effective life. However, by using what the ATO calls the ‘immediate deduction‘ and ‘low-value pool‘ rules, you can claim more sooner.

The immediate deduction allows you to claim the full cost of eligible assets under $300 in the same financial year. Low-cost or low-value assets that aren’t eligible for the immediate deduction could still be claimed sooner in the low-value pool.

The low-value pool allows some plant and equipment assets to depreciate at an accelerated rate. When placed in the pool, assets depreciate at a rate of 18.75 per cent in the first financial year and 37.5 per cent each following year. There are two ways that an asset can be eligible for the pool:

• It’s a low-cost asset, with an opening value of $1,000 or less
• It’s a low-value asset, with a written-down value of $1,000 or less. This is when an asset’s opening value was more than $1,000 but the residual value is now less than $1,000.

Maximise renovation deductions

Depreciation deductions can be claimed for any new assets installed during a renovation. Plus, any undeducted value on removed assets can be claimed through a process called scrapping.

To claim depreciation for the removed assets, a tax depreciation schedule must be completed before and after a renovation. You can then claim both the first-year deductions of the new assets and the total remaining value of the removed assets in the same financial year.

When can depreciation be claimed?

Depreciation deductions can be claimed for the entire period that a rental property is ‘genuinely available for rent’. This means if your tenant has left unexpectedly and the property is empty while you advertise for new tenants, you can still claim deductions for this time.