Most days we receive phone calls from investors asking if it is worth claiming depreciation for an old property – and our answer is always the same – depreciation claims depend on so many factors. You will see from the results below for this older Newcastle property, that property age does not determine feasibility alone.
What many investors may not have considered when they are tempted to rule out the depreciation value of an older property, is that older houses are typically no longer in their original construction state.
Most often, previous owners have, over time, completed additional construction works (capital improvements and renovations, ie. pergola, bathroom, kitchen or verandah converted to backroom etc).
Those construction works, which can be quite substantial, will still generate thousands of dollars in depreciation deductions each year for the current owner.
Our client Josephine was delighted with the depreciation claimable for her ‘old house’ in Newcastle, NSW – her results are below, but first a quick explanation of how older properties can still qualify for substantial depreciation deductions.
Investor owners can claim a Capital Allowance deduction for the depreciation of eligible construction works
Division 43 Capital Allowance (or Building Write-Off) refers to the depreciation of the construction component of a building. It encompasses things such as bricks, tiles, gyprock, paint, floorboards, aluminium window frames and doors.
The ATO is very prescriptive when it comes to effective lives and depreciation rates for Division 43 Allowances. Typically, a standard residential investment property built after 15/07/1987 will have an effective life of 40 years and depreciate at 2.5% per year.
However, variations apply depending on the exact construction date of the building, and the use or type of property being depreciated. A table of different property types and their rates can be found below.
Investor owners can claim depreciation for any new Division 40 assets installed
Division 40 Allowance refers to the brand-new ’plant and equipment’, items of a residential investment property. Typically, this includes items such as:
- Blinds
- Curtains
- Stovetops
- Ovens
- Air conditioners
- Hot water systems
- Light shades
- Rangehood
- Carpet
For brand-new furnished investment properties this also includes all the furniture that is included in the property.
The effective life and depreciation rate for brand-new plant and equipment items is individualised for each and every asset. That means brand-new blinds depreciate at a different rate to a brand-new stovetop, and at a different rate to brand-new bathroom accessories.
For all existing plant and equipment assets a value will be placed against these items to offset the Capital Gains Tax when the property investor sells their investment property.
Case Study Results
Our clients Josephine and Carl’s accountant thought their property was too old to claim depreciation (especially since the legislation changes back in May 2017). Josephine decided to investigate further and called our office.
The couple had purchased an older house located in Glendale in June 2022 for $735,000. The property, built in 1997, consists of 4 bedrooms, 1 bathroom and 1 car park. The previous owners completed renovations in 2001, 2005 and 2010. Josephine and Carl replaced the hot water system.
Josephine and Carl were entitled to claim in depreciation:
First full financial year: $5,356
First five financial years (total): $26,974
Over the life of the report (40 years): $112,434
If Josephine and Carl sell their property in 5 years time, they are entitled to claim $8,288 to offset their Capital Gains Tax.
Back in May 2017, the government announced that individual investors could no longer claim depreciation of existing residential Division 40 assets as an annual tax deduction. Instead, the value of these assets will be claimed as a CGT offset when individual investors sell.
How do you claim your depreciation deduction?
In order to maximise your deductions and minimise your risk, we recommend using a qualified quantity surveyor to undertake the process of inspecting when necessarily as virtual inspections can be an option for qualifying properties, researching and preparing your capital allowance and tax depreciation schedule.
Here at Capital Claims Tax Depreciation, we have been preparing quality depreciation schedules with maximum depreciation results Australia Wide since 2008.
We have helped over 35,000 residential and commercial property investors save thousands, tens of thousands and even hundreds of thousands in depreciation deductions.
FAQ’s
Are all quantity surveyors and tax depreciation service providers equal?
Absolutely not. But the range in pricing of depreciation schedules, compared to the dollars that can be saved over the years, is small. When selecting a quantity surveyor to produce your depreciation schedule, you can use the following checklist.
Your quantity surveyor should be:
- Appropriately qualified with a Bachelor of Construction Management or similar;
- A Registered Tax Agent (this is requirement of the Tax Practitioners Board for all quantity surveyors producing tax depreciation reports to be relied upon for tax purposes);
- A member of a recognised association or body, such as the Australian Institute of Quantity Surveyors.
How do I know it will be worthwhile to claim the depreciation deduction on my older investment property?
We will complete a free feasibility on your older investment property. We will notify you of what depreciation deductions you can expect to approximately claim in the first full financial year.
If you would like to discuss your older investment property, please call and speak to Peter on 1300 922 220. Or complete our simple ‘get an estimate’ online form.
