Owning an investment property can not only deliver good income and capital growth, it can also provide some excellent taxation advantages. There are the standard deductions, such as interest on borrowed funds and property management costs, but there are also lesser known additional benefits to be obtained through depreciation.
Depreciation is the process by which buildings and associated fittings are devalued over their lifetime. In relation to investment properties, there are two different types that may apply—capital works depreciation and plant depreciation.
Capital works depreciation is based on the original construction cost, whereas plant depreciation refers to the value of various fixtures and fittings, such as hot water systems, an oven, curtains and air conditioners.
With capital works, the original cost of the building is usually depreciated at 2.5% per year, with the cost of construction essentially being written off over a period of 40 years. Any renovations undertaken on a property may be depreciated from the completion date. However capital works depreciation is often only applicable to properties built after 18 July 1985.
On the other hand, plant depreciation has no set rate. It is based on the operating life of the asset, under either a prime cost or diminishing value method. These methods are illustrated in the following example:
Warren replaced all of the air conditioners in his investment property on 1 July 2011, at a cost of $6,900, which he began to use immediately, with the systems having an effective life of seven years. Under the prime cost method, Warren was able to claim $986 in depreciation on the systems for the 2011/12 financial year. Alternatively, if Warren had opted for the diminishing value method, he would have been able to claim $1,972 in depreciation on the systems for the 2011/12 financial year.
With differences like this, always consult your financial adviser or accountant to help you maximise your depreciation benefits and enhance your cash flow.
www.depwest.com.au ‘Not claiming tax depreciation is like not charging rent’
www.ato.gov.au ‘Guide to depreciating assets 2009’