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The benefits of Depreciation

Marty McDonald - Tuesday, January 31, 2017
Depreciation is essentially a tax deduction available to all property investors. A property investor is able to claim depreciation on both residential and commercial property, so it does not matter what type of property buyer you are, you are still entitled to claim your share of depreciation!

As a property investor, there are many tax deductions you are entitled to, however, there is only one deduction that comes in-built within the property when you purchase it. And that’s depreciation.

You see all other property tax deductions you can claim, you have to physically pay for, such as rates, interest payments & property manager's fees.

Depreciation does not mean you will receive cash-in-hand at tax time in return for all the items you spent money on throughout the year. Instead, depreciation allows an investor to claim tax deductions on the wear and tear of on an investment property over time.

This is because the Australian Tax Office (ATO) recognises that buildings and the items within the building will eventually become worn out over time and need replacing.

The difference between the Building Allowance and Plant & Equipment-

These are the two major components when claiming depreciation on a building.
  1. The building allowance allows you to claim the actual structure of the property and include items like the bricks, concrete, ducting and vents.You can claim the building allowance at a fixed rate of 2.5% per annum based upon the original construction cost and it starts from the when the building was originally completed. The ATO has determined a Quantity Surveyors construction cost estimate will be accepted in cases where the original costs are unknown.
  2. Plant and Equipment items within the property are those that will wear out quicker and are easily removable. Some common items include ceiling fans, carpet, ovens and freestanding furniture.

Why am I able to claim depreciation?

If you are a property investor you are able to claim depreciation because your investment property earns income, through the form of rental payments from your tenants. So, as with any activity that produces an income, there are various tax deductions available to you.

How do investors benefit from a depreciation schedule?

Depreciation allows investors to reduce the amount of taxes they have to pay. Investors are able to claim depreciation on the wear and tear of the property and on any renovations they have made to the property.

A depreciation schedule lasts up to 40 years, depending on the age of the property and on top of this, the depreciation schedule itself is tax deductible.

Case Study - Renovating a property

Joan French buys a property built in 1996 for $550,000 and leases the property out immediately for one year.

Washington Brown visited the property and estimated that the original building allowance was $100,000 and that there was still $20,000 of plant and equipment included within the purchase price.

Washington Brown calculated that Joan could claim $2,500 in the building allowance for the first year and $6,000 in depreciation from the plant and equipment that was left in the property (mainly blinds, kitchen appliances and carpet).

The tenant moved out after a year and Joan decided it was the perfect time to renovate the property.

Joan replaced the whole kitchen, and also put in new carpet and blinds.

Because there was still some residual value in these items, Joan was able to claim a balancing deduction immediately of over $12,000 on the items she threw away.

Joan then spent $40,000 on the renovation and could claim these items from scratch, which added another $6,750 to her tax deduction claim.

So, all together, Joan was able to claim well over $20,000 in depreciation within the first 18 months. Now remember, we are talking about an old property - Joan’s deductions are pretty impressive!

Claiming depreciation can be a complex matter and it pays to ensure you get it right - contact Washington Brown on 1300 990 612 or simply get a depreciation quote here.

About the director at Washington Brown: Tyron Hyde has a Degree in Construction Economics (UTS) and is an Associate of the Australian Institute of Quantity Surveyors. He began his career at Washington Brown in 1993 as a wide-eyed intern looking for a break in the industry. Twenty years later, Washington Brown is recognised as one of Australia’s leading tax depreciation companies.

With his passion and knowledge of property depreciation, Tyron is a regular speaker at industry conferences and is often quoted in national media. He has also published numerous articles and books including his popular CLAIM IT! book.

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About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on and LinkedIn.

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