Property Depreciation

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What is Property Depreciation Schedule, and How Can Tax Depreciation and Depreciation on Your Investment Property Increase Cash Flow

You have purchased a residential property in a good neighbourhood as an investment, so depreciation is the last thing you probably consider. After all, the objective is for the property to increase in value. Property depreciation is a fact, but if managed as part of the investment, it becomes a profit generator for the savvy investor.

Let’s Explain Depreciation on an Investment Property…

The residential property consists of two parts: the capital works and the plant and equipment. These two parts must always be separated in the portfolio, as the former appreciate, while the latter almost always depreciates under normal conditions. We fleetingly describe the differences and reasons below:

  • Capital works. This is the actual property, meaning the plot of land, the house and all other non-removable structures. Capital works constitute the real investment and should be kept in a well-maintained state of repair for maximum return later at the disposal date. Usually, capital works do not depreciate, only requiring repairs.
  • Plant and equipment. This is the technical term for all the removable or replaceable items on the property. Examples include the curtain rails, the stove, the water heater and security gates. These items usually have a limited lifespan and will be replaced several times during the investment period. The depreciation on the plant and equipment must be accurately calculated for maximum tax benefits.

Tax Depreciation Is SO Important

Expenditures made for the maintenance and upkeep of an investment residential property are tax-deductible. This is generally the obvious deduction that investors make when filing their tax forms with the ATO. The expenditures are for when repairs are necessary, which is then difficult to work into the budget and a shock to the cash flow. If the investor uses a depreciation schedule for the property, they can partly deduct most future replacements and repairs yearly. There are, however, a few things to keep in mind:

  • The ATO has decided that after May 2017, depreciation on an investment residential property can’t the deducted from income tax. They agreed that only improvements and replacements to plant and equipment made by the existing owner after May 2017 could be depreciated against income. Everything that was bought part and parcel with the property can’t be depreciated anymore.
  • The ATO only accepts tax depreciation reports compiled by a qualified quantity surveyor and is in the prescribed format. The benefit is that a quantity surveyor can assess the current value of the existing plant and equipment which came with the property when bought. Although it can’t be depreciated, the value may be offset against the capital gains tax due when the property is sold for a profit at a later date.

DEPPRO compiles tax depreciation reports for property investors anywhere in Australia. We follow a 40-year investment strategy that increases the monthly cash flow for rental income through tax depreciation schedules accepted by the ATO.

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