Owning an investment property is a fantastic way to secure your future and achieve financial freedom; however, many investors are overpaying tax on their investment by not claiming a tax deduction for their property depreciation.
What is Tax Depreciation?
Tax depreciation is the depreciation claimed by an investment property owner to compensate for the loss of value of physical assets used in an income-generating endeavour. These depreciation expenses are allocated over multiple periods, meaning that the overall tax on depreciable tangible assets will decrease over the course of their lifetime.
What are some examples of assets that may depreciate over time?
Plant and Equipment Depreciation
Plant and equipment depreciation refers to depreciation of assets within your investment property that have a finite lifetime and that will lose value over time. This value loss is typically attributed to ageing and general wear and tear as they are used over the years. Assets within your property that fall under this category include fittings such as lighting, carpeting and flooring, appliances such as a stove or fridge, security systems such as cameras and alarms, air conditioning and heating units, and even garbage bins that are provided as part of the property.
Capital Works Depreciation
Capital works depreciation refers to aspects of the property or building such as constructions, extensions, renovations, and any structural alterations or improvements. Projects included within this include garage or patio extensions, renovations or makeovers, and additions such a gazebo, carport, fence, or sealed driveway.
How do I know if my assets are eligible for tax depreciation?
A tax professional can help with personalised advice and recommendations for your investment property; however, there are some criteria to consider when determining if your assets are eligible for tax depreciation.
1. The asset has an ascertainable lifespan, and it’s useful life surpasses one year.
For an asset to be eligible for a depreciation claim, it must have a useful life that exceeds one year, and that can be relatively estimated. An asset must be a long-term asset, implying that it has a useful life of more than 12 months, and you must be able to provide a reasonable estimate for the number of years the asset’s useful life will last.
2. The property owner owns the asset.
Any assets that are eligible for tax depreciation must be owned by the taxpayer. For example, if a tenant owns the stove in the property, this cannot be claimed on a tax deduction.
3. The asset is used in income-generating activities.
Assets that are used in an income-generating context are eligible for depreciation, and can be deducted from the tax amount. This does not extend to personal items or assets acquired for personal use. For example, you cannot claim tax depreciation on flooring in your personal home.
Tax depreciation is a great way to capitalise on your investment and reduce the overall tax paid on your property for the time that you own it. Tax depreciation specialists, like Deppro, can help take the guesswork out of your tax time, so for more information please feel free to reach out to our friendly team today.