What tax deductions are available to property investors?

When looking to purchase an investment property, it is worthwhile to ask a number of questions. While many investors consider location, purchase price and tenanting ability when contemplating an investment property purchase, depreciation is often overlooked as an important factor. Depreciation can help unlock the cash flow potential within an investment property, often resulting in thousands of additional dollars for the investor each financial year.

What is depreciation?

As a building gets older, items wear out – they depreciate. The Australian Taxation Office allows property owners to claim this depreciation as a deduction. Depreciation can be claimed by any property owner who obtains income from their property.

Claiming building structure as a deduction

Capital works allowance deductions are based on the historical cost of the building excluding the cost of all ‘plant’ and non-eligible items. As a general rule any residential building which commenced construction after the 15th September 1987 and any commercial property which commenced construction after 20th July 1982 are eligible for the capital works allowance.

Common depreciable items in an investment property

Plant and equipment items, commonly known as removable assets, are also eligible for depreciation deductions*. Each plant and equipment item has an effective life set by the Australian Taxation Office. The depreciation deduction available on each item is calculated using the effective life. Some plant and equipment depreciable items commonly found within a property include:

• Hot water systems

• Ceiling fans

• Blinds and curtains

• Exhaust fans

• Light shades

• Ovens

• Furniture

• Dishwashers

• Carpets

• Range hoods

• Smoke alarms

• Garbage bins

• Cook tops

• Door closer

Claiming depreciation during renovation

To ensure property owners are making the most of the tax deductions available, they should consider a pre-renovation depreciation report. Old assets within a property can be worth thousands of dollars. When these old assets (like carpet and hot water systems) are replaced during a renovation, the owners may be entitled to claim them as a tax deduction. A Quantity Surveyor, who is qualified to calculate values and construction costs, can ensure the owners are not throwing dollars away.

Investment property owners who are aware of potential deductions are able to maximise cash flow through their investment properties.