Why calculate depreciation on an investment property?

By calculating depreciation on your investment property, you may be able to claim an income tax deduction and lower your overall tax payment in a financial year.

When buying an investment property, you need to consider that your costs will go far beyond the initial purchase price. You will also incur costs preparing the property for rental, and maintaining it in good-working order for your tenants. There may be initial costs fitting the property out, renovating or repairing it. Furthermore, over time wear and tear may mean the replacement of:

  • flooring,
  • furniture,
  • appliances. Furthermore, structural improvements may need to be made. This creates an expense to you so will lower your net income. However, by calculating depreciation – the decline in value of an asset over time – you may be able to claim your costs as an income tax deduction. Therefore it’s important to keep detailed records of all the expenses you incur in holding a property so you can offset your tax liability. We always recommend that you speak to a tax accountant or contact the Australian Taxation Office (ATO) for advice on depreciation, but here is some general information:

What is building depreciation?

Building depreciation takes in more than just the structure itself. It also allows you to claim for depreciation of plant and equipment, which are the fixtures and fittings. This means you can claim a percentage of the money you spend on the building and its fixtures. Typically, this rate stands at 2.5%, which applies from the date of the property’s construction. Say you buy an investment property today for $500,000 that cost $200,000 to build back in 2000. Using depreciation of 2.5% against its original construction cost, you could claim up to $5,000 annually against the income you receive from rent. However you can only do this until 2040 as 40 years is the maximum time the ATO says a building can depreciate before it reaches its life expectancy.

What about furniture depreciation?

The ATO allows you to claim against the cost of your furnishings for several years after you fit them. On top of that, you can claim further deductions for any furniture you fit in the property after the purchase date.

What is a depreciation schedule?

A depreciating asset will decline in value over the years as it has a limited life expectancy. A depreciation schedule allows you to figure out which items you can claim on, and how much value each will lose over time. Your schedule should include deductions for:

  • plant,
  • equipment, and
  • construction costs. Some people create their investment property depreciation schedule, but it often pays to employ the services of a quantity surveyor to ensure it’s correct and that you don’t miss anything. If you do use a professional, expect to pay somewhere in the region of $400 to $750. However, you may find you can get the depreciation schedule free of charge from a developer if you’re buying a newly built property.

Prime cost vs. Diminishing value

How to calculate depreciation?

There are two ways of calculating depreciation, as detailed by the ATO:

  • Prime Cost Depreciation (Straight line) – this assumes that the value of a depreciating asset decreases uniformly over its effective life.
  • Diminishing Value – this assumes that the value of a depreciating asset decreases more in the early years of its effective life.

Using the ATO depreciation calculator

The ATO has a calculator which you can use. Note this is general in nature and not specifically for individuals investing in property. A good tip: if you create myGov account and link it to ATO, you can save your records and calculations for use in your tax return. Find out more with the ATO depreciation calculator and see some working examples by visiting the ATO website.

Do depreciation claims impact CGT?

Depreciation can help you save a lot of money on your tax bill in a financial year. However, you cannot claim this tax allowance more than once. Therefore, if you decide to sell your investment property you will have to deduct the depreciation you have already claimed from your cost base. Reducing your cost base will increase your gross capital gain and therefore the tax you will pay. Despite this tax liability, freeing up cash flow in the short term could also make good financial sense over the long term. For example it may enable you to pay down your debt faster, or make additional investments to generate new income streams. So it’s always worthwhile speaking to a professional to discuss your financial objectives and to decide which strategy will be most beneficial to your personal circumstances.

Next steps:

Book Call Now

UNO home loans

Need help with your home loan?

UNO Brokers are available night and day for a quick review or your situation and bring expertise that will support better decision making that will save you time and money. Book in a quick call when it suits your busy schedule

Get Started

Related Articles

TESTIMONIALS

What our customers are saying

Sally Mackenzie
February 19, 2024
We chose Uno Home Loans from their impressive web site knowing we were going to find it hard, on many fronts, to qualify for a home loan. We were incredibly fortunate to be assigned Mike Parsons as right from the get-go, despite the complexities, he hit the ground running for us. He was incredibly knowledgeable, with years of experience but what was immediately apparent and impressive was that he was totally invested in getting us over the line, doing absolutely everything possible, including working around the clock. Despite it being a relatively small loan in the order of things, Mike never missed a beat, getting docs ready, following up and answering every request from the proposed funder immediately. He kept us informed on progress the minute anything happened, and again if anything needed to be done, he was right on it. In short, we highly recommend Uno, and Mike, knowing what a remarkable job he did, over many weeks, to get us our loan. He got us a great deal, with far better rates than we expected, so we couldn't be happier. In fact, without doubt, you'd be hard pressed to find a more personable, sharp, hard working, dedicated professional who clearly prides himself on getting his customers standout results.
Read more
Rod
February 13, 2024
Scott and his team were just A-mazing. We felt supported through the whole process with the greatest quality and care. Every question answered right in time, or even before we asked. The process was smooth and we got the best outcomes we could have wished for.
Read more
Angela Biddle
February 6, 2024
Our mortgage recently came up for renewal, and with interest rates skyrocketing we were looking for ways to minimise the impact. Michael and his team were proactive and attentive. Michael spent time with us to understand our circumstances. He found mortgage options that worked with our current financial situation and longer investment plans. He presented clear options, providing guidance where needed. He and his team were helpful and responsive - streamlining the process and keeping us updated through the negotiations. In the end, Uno did the heavy lifting and secured a significantly better rate than our current bank offered, all with friendly, personal service. We would highly recommend UNO Home Loans.
Read more
Fotis Bikas
January 15, 2024
I cannot help but congratulate Scott Wilkinson of UNO Home Loans for being an absolute credit to both his company and the entire loans industry. Scott is a truly rare gem of a broker in that he will not only go the extra mile to achieve for each customer the very best deal, but his knowledge of all and sundry within the industry is unsurpassed (you will see what I mean if you speak to him). Additionally, Scott has a clear passion for imparting his wealth of information with each customer, whereas the conversation with most other brokers would simply be over if they could not get you the best deal. For me, Scott Wilkinson of UNO Home Loans stands head and shoulders above the competition and I feel privileged to benefit both from his expertise and professionalism whenever it is time for a refinance or new loan.
Read more
Tomoharu Matsui
January 11, 2024
Michael Parsons helped me a lot when it's difficult to establish my capabilities in loan.
Read more
Gillian Kearon
January 9, 2024
I highly recommend Mike Parsons as a mortgage broker. I couldn't fault the service provided by UNO. Thanks Mike!
Read more
Taner T
December 20, 2023
Thank you Eren Tan for the amazing service and support. Our Loan was a little tricky and complex for other lenders but Eren managed to get it over the line in record time. His professionalism and dedication to our needs was exceptional. If you need a Loan no matter how complex your situation, make sure you contact Eren at UNO Home Loans.
Read more
Karaipu Brown
December 20, 2023
Buying & selling a house at the same time is very stressful but Scott Wilkinson from UNO home loans made sure we knew what was happening & took most of the stress away. He always kept us up to date and if we had a concern or wanted clarification on something we were able to call him, if he didn’t know the answer straight away he will find out and contact us back.. now we are enjoying our new house and turning it into a home :)
Read more
Chris Anderson
December 18, 2023
Just completed my first loan with UNO which was so much easier than with other other brokers I have used in the past. Our broker MIKE PARSONS always had time for me and broke things down for me in the simplest of terms and was very patient with my silly questions and my constant changing of plans. I wish I had used them in the past as I wouldn't be in the situation I'm in now. Can't recommend them highly enough. Thanks UNO and Thanks MIKE 😊
Read more
Stephen Broomfield
December 11, 2023
To be able to recommend Scott Wilkinson for your mortgage broker was a privilege. We had deals fall through but Scott supported, guided and stuck with us, proper partnership. The whole team at UNO helped us and supported us right through to after settlement. Made sure everything was correct and how we are progressing. Communication was amazing and straightforward and easy to understand. Transparent. We can not Recommend Scott and the team as Uno high enough. Use UNO with confidence.
Read more
Tarek Hussain
December 6, 2023
Can't thank Amy enough for her hard work, dedication and determination on getting multiple loans completed for me. I wouldn't hesitate in recommending Amy and the Uno team to any of my associates. Will definitely be back in the near future!
Read more
Linda
November 3, 2023
If you’re looking for a trustworthy, thorough, reliable & knowledgeable Mortgage Broker then you must call Anita Callaghan! I can’t even imagine how stressful this process would’ve been without her. Anita went above and beyond to make sure she answered every question, responded to every text (even on weekends/after hours), and followed up on every detail to ensure we had all the info we needed. Anita is a true people person who is warm, empathetic, kind and supportive. You can tell she loves helping people and loves what she does, which is probably why she’s so good at it! Can’t thank you enough Anita, or recommend you more highly! You’re the best!
Read more