What is Rental Property Depreciation & How Will It Affect Your Property?
If you’re in the rental property market, no doubt you have heard the term rental property depreciation. It sounds ominous, however you needn’t go running off to your tax agent or financial advisor to have it explained.
What is Rental Property Depreciation?
- Rental depreciation, put simply, is the claiming of the decreasing value of your property against your taxable income.
- If you’ve purchased a property with the intention of renting it out, the property’s value will lessen each year.
- You can claim the cost of the property over the time it will last before it needs replacing, which the ATO says is approximately 40 years. That is a “capital works deduction”.
- “Depreciating assets” are the bits you own that aren’t property: light fittings, stoves, carpets etc. The ATO says the “life” of the asset is how long it is until it needs replacing. For carpet, it’s about 10 years.
How to claim
Some property investors take depreciation into account before they purchase a property as it affects their bottom line, and how much tax they pay come July 1. And your home is never too old. Properties built after 1985 can claim on both plant and equipment (assets) and building (capital works). If your property’s construction began before 1985, you can only claim on plant and equipment. Rental property depreciation is a non-cash deduction – you don’t need to spend money to claim it.
You can claim depreciation two ways: the prime cost method (claiming the same equal amount over the lifespan) or the diminishing value method (claiming more earlier, and less later). The ATO gives property investors these tax breaks to reward them for providing rental properties, and also to reward them for providing themselves future financial security (instead of relying on the pension). These tax breaks are much better the newer your property is, however older properties can still be eligible.
The best way to go about claiming these deductions is to engage the services of a quantity surveyor and have them visit your home. They’ll prepare a report for your accountant (in fact if your property was built after 1985, a surveyor must prepare the report). It’s that simple. If you’ve undertaken renovations, you can claim on them, too. Don’t forget, the cost of the surveyor is tax deductible and most give you a money-back guarantee that you’ll save at least double their fee in the first year.
Claiming rental depreciation will allow you to increase the money you earn on your property. Which is the main aim, after all. For help with how you can claim rental depreciation, talk to our friendly staff at Aspect Estate Agents today. Calculating the ROI of your rental property is also important to know! Read our ‘How To: calulcate Investment property ROI‘.