Can I claim depreciation on a rental property in Australia?
Yes, you can claim depreciation on a rental property in Australia for eligible assets and capital works. This allows you to deduct the decline in value of certain parts of your investment property over time, reducing your taxable income.
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How it works in practice
Understanding Depreciation on Rental Properties
Depreciation on a rental property in Australia refers to the tax deduction you can claim for the natural wear and tear and aging of your investment property over time. This includes both the structural elements (known as capital works) and the fixtures and fittings within the property (referred to as plant and equipment).
What You Can Claim
Capital works deductions cover the construction costs of the building itself, or renovations made to it, such as brickwork, concrete, roofing, and fencing. These are typically depreciated at a rate of 2.5% per year over 40 years. Plant and equipment items are detachable assets like ovens, dishwashers, carpets, and air conditioners. These are depreciated based on their effective life and value, often at a higher rate. Claiming these deductions can significantly reduce your assessable income.
Purpose of the Deduction
The purpose of allowing depreciation claims is to recognize that the value of an asset declines over its useful life, and this decline is a cost to the investor. By claiming these deductions, property investors can offset a portion of their income tax liability, effectively reducing the net cost of owning and maintaining their rental property.
Important exceptions
Not all items or scenarios qualify for depreciation claims. You cannot claim depreciation for assets that are not integral to the rental property, such as personal items. Notably, if you purchased a second-hand residential property after 1 July 2017, you generally cannot claim depreciation on existing plant and equipment assets previously used by a tenant or in a private capacity. You can only claim depreciation on new plant and equipment you install after purchasing the property. Only the first owner of new plant and equipment can claim depreciation.
What you should do now
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Understand what you can claim by distinguishing between "capital works" (the building's structure) and "plant and equipment" (removable fixtures).
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Obtain a professional depreciation schedule from a qualified quantity surveyor to accurately calculate eligible deductions.
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Keep detailed records of all renovation costs and purchases of new depreciable assets for your rental property.
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Report your depreciation claims annually in your tax return using the information from your depreciation schedule.
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Seek advice from a tax professional if you are unsure about specific eligibility criteria or complex scenarios.
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