What you need to know about depreciation schedules

When you own an investment property, there are a lot of things to take into account at tax time.

One of the biggest factors is depreciation. This is the amount that items within your property have lost in value during the financial year. 

You can claim depreciation on your Neutral Bay property, but you will need something called a depreciation schedule. We’ve outlined what this involves below: 

What is property depreciation?

Depreciation is created by the wear and tear on your property and associated assets that lower the value.

The ATO recognises two types of depreciation:

• Capital works deduction (referred to by the ATO as Division 43): Capital works refer to the structure of the building, so includes items such as retaining walls, timber framing, built-in wardrobes, concrete slabs, and other structural features that can wear out over time.
• Plant and equipment deduction (referred to by the ATO as Division 40): Plant and equipment deductions, on the other hand, refer to removable fixtures like ovens, carpeting, blinds and smoke alarms.

What is a tax depreciation schedule?

A tax depreciation schedule is a report that breaks down the depreciation deductions you can claim on your investment property and its associated assets. It is like a ‘short cut’; a pre-prepared document that is created by experts in this area and given to you to share with your accountant and the ATO. 

To be considered valid by the ATO, your depreciation schedule needs to be prepared by a qualified quantity surveyor. There are dozens in Sydney and we are happy to recommend some to you. 

The report you end up with will contain the original value, estimated lifespan and depreciation rate of all the components of your property that meet the capital works and plant and equipment deduction categories mentioned above.

The best news is that you only have to pay for a depreciation schedule as a one-off. You can use the same depreciation schedule for as many years as you own the property. The current fees should be less than $1000. 

What are the benefits of claiming your depreciation schedule?

Obviously, any deductions you can claim are beneficial to your budget.

Claiming your depreciation schedule, though, presents these more specific benefits:

• The improved cash flow from your depreciation schedule deductions can save you from having to negative gear your investment property.
• The improved cash flow can also help you add to your portfolio.
• The depreciation schedule is a non-cash deduction, meaning that you do not have to spend the money first, unlike some other rental expense deductions.
• You can put aside money that your depreciation schedule helps you save to offset the costs of, for example, replacing the carpet in your investment property

Can you claim depreciation if your investment property is old?

Simply because a property is old does not mean you can’t claim depreciation on it. Older properties will still have assets that depreciate over time.

For capital works, the ATO allows you to claim 2.5% per annum on any Sydney real estate built after September 12 1987, up until the home is 40 years old, 40 years being considered the general effective life of a building. So if you buy a home built in 2003 in 2023, you will still have 20 years left to be able to claim.

For plant and equipment deduction, different assets age at different rates. For example, the life span of carpeting is considered to be years and air conditioning to be 10 years. This is why your depreciation schedule is so important when calculating your return for these assets.

Final tips

Claiming depreciation can’t be your goal in property investing as there are caveats and it can be a ‘swings and roundabouts’ situation if you make a capital gain when you sell.

Now you have an idea of what a depreciation schedule is, we recommend you speak to your accountant who can explain how it will help you manage the costs of your investment property. 

Want to know more about our property management services, or investment properties in Neutral Bay? Contact us today.