Understanding property depreciation and its benefits

Depreciation refers to the gradual wear and tear that occurs as assets age, leading to a decrease in their value. For investment properties, depreciation applies to both Plant and Equipment and Capital Works, which are classified separately for tax purposes. Accurately calculating depreciation is essential for maximising tax benefits.

As an investor, you can claim tax deductions for depreciation, potentially increasing your tax refunds and improving your overall financial position.

Methods for Calculating Depreciation

The Australian Taxation Office (ATO) prescribes two methods for calculating property depreciation:

Prime Cost Method – Provides uniform depreciation deductions over the asset’s effective life.

Diminishing Value Method – Allows for higher deductions in the earlier years of ownership.

These methods determine how much depreciation you can claim each year, impacting your tax savings over time.

Tax Depreciation Schedule

A tax depreciation schedule is an ATO-compliant document that outlines the depreciation deductions available for an investment property. This schedule categorises depreciation into two parts:

• Capital Works (Division 43) – Covers structural elements like walls, floors, and roofs.
• Plant & Equipment (Division 40) – Includes removable assets such as appliances, carpets, and air conditioning units.

Having a tax depreciation schedule prepared by a qualified quantity surveyor ensures you maximise your available deductions.

Why Depreciation Matters for Property Investors

Property tax depreciation is a valuable tool that helps investors reduce their taxable income. The ATO permits property investors to claim depreciation on eligible assets, which can significantly lower tax liabilities and improve cash flow.

By leveraging depreciation, investors can:

• Offset the natural wear and tear of their property.
• Reduce their annual tax bill.
• Enhance financial returns and optimise investment strategies.
• Maximising Investment Returns

Depreciation plays a key role in effective property investment by reducing taxable income and improving overall financial outcomes. Understanding and applying depreciation strategies correctly can lead to better investment decisions, increased savings, and a more profitable property portfolio.

For investors looking to optimise their tax position, consulting a professional to prepare a tax depreciation schedule is a crucial step in ensuring they claim all eligible deductions.

Source: duotax.com.au