Importance of a depreciation schedule for rental properties

As a property investor, you’re likely looking for ways to increase your rental income and reduce your taxable income. One strategy that’s often overlooked is claiming property depreciation. By preparing a tax depreciation schedule for your residential rental property, you can boost your cash flow through annual tax deductions. For brand-new properties, a depreciation schedule helps you claim deductions for capital works and plant and equipment assets, maximising your tax benefits each financial year. However, second-hand residential properties have no depreciation deductions on plant and equipment.

What is a tax depreciation schedule, and how can it improve your tax return?

A depreciation schedule is a detailed report that outlines the tax deductions you can claim for your investment property. It breaks down the property’s value, including construction costs and all fittings and fixtures, helping you identify the tax-deductible expenses you can claim.

The schedule covers plant and equipment assets and capital works, showing how much these assets have depreciated and will continue to depreciate. This lets property investors see the amount they can claim for tax depreciation, providing a clear financial benefit. 

Benefits of a depreciation schedule for your investment property

Having a tax depreciation schedule professionally prepared by a quantity surveyor offers several distinct advantages for property investors:

• Easier property investment decisions

It can make your first or next investment property more financially appealing, supporting your efforts to build wealth from real estate.

• Improved cash flow

Accurately calculating your depreciation can shift a negatively geared property towards a better cash flow position, reducing out-of-pocket expenses.

• One-time expense with ongoing benefits

Unlike many property-related costs, a depreciation schedule is a once-off investment, allowing you to claim tax deductions year after year without additional spending.

• Tailored to maximise deductions

The schedule ensures you claim every eligible deduction for new and existing properties, following all Australian tax laws and guidelines. This helps you get the most financial benefit from your investment.

Case studies related to depreciation schedules for rental properties

Depreciation on Newly Constructed Rental Property

Scenario:

John is purchasing a newly constructed rental property and seeks clarification on claiming depreciation for capital works and plant and equipment.

ATO Ruling:

The ATO confirms that John can claim deductions for capital works. The deduction rate is 2.5% annually for residential properties built after September 16, 1987. However, John had to obtain a quantity surveyor’s report or use reliable documentation, such as builder’s costs, to determine the construction cost.

ATO also outlines that plant and equipment assets (e.g., carpets and air conditioning units) can be depreciated. As the property is newly constructed, John can claim depreciation based on the asset’s effective life.

Key Takeaway:

New construction allows maximum depreciation benefits because capital works and plant and equipment can be claimed without restrictions. 

 Depreciation on Second-Hand Rental Property

Scenario:

Mary is purchasing an older rental property with existing assets and inquires about claiming depreciation on the plant and equipment within the property.

ATO Ruling:

Mary can claim capital works deductions if the construction commenced after September 16, 1987, and if sufficient evidence (e.g., historical records or a quantity surveyor’s report) is available.

ATO explains that under legislative changes effective July 1, 2017, deductions for second-hand plant and equipment assets are generally disallowed for residential rental properties. However, Mary may claim depreciation if they purchased the assets themselves after acquiring the property or if they were first used as new for rental purposes.

Key Takeaway:

Under the 2017 rules, plant and equipment depreciation in second-hand properties is restricted, emphasising the importance of taxpayers’ new asset purchases or improvements.

General Implications for Investors

• Use of Quantity Surveyors: The ATO recommends quantity surveyors estimate construction costs when records are unavailable, ensuring compliance with tax laws.
• Substantiation: Adequate records must be maintained to substantiate claims, especially for older properties where evidence of construction dates and costs may be less accessible.
• Strategic Renovations: To maximise deductions, taxpayers may invest in upgrading plant and equipment assets post-purchase, allowing depreciation claims under the new rules.

Given the complexity of depreciation claims for rental properties and the benefits involved, you may seek expert advice.