Depreciation Schedules and Property Returns

Key takeaways

• Depreciation improves cash flow without any cash outlay.
• Division 43 capital works: generally 2.5% a year for 40 years on eligible construction.
• Division 40 plant and equipment: restricted for second-hand residential since 9 May 2017.
• Capital works deductions reduce your CGT cost base - the benefit is partly deferred.

What are the two categories?

The distinction matters because it determines what you can still claim on a property you bought second-hand, which is most investors.

What did the 2017 change do?

For residential rental properties, deductions for previously used plant and equipment were removed for investors who acquired the property after 9 May 2017. In practical terms, if you buy an established home, you generally cannot depreciate the existing oven, carpet or air conditioner the way an investor could before that date.

What survived: capital works deductions on eligible construction are unaffected, and plant and equipment you buy new yourself after acquiring the property can still be depreciated.

The effect is to make newer property and new plant more attractive from a depreciation standpoint - which is a tax consequence to be aware of, not a reason to buy a property you would not otherwise buy.

Is a quantity surveyor report worth it?

Usually, if the property has depreciable value. A quantity surveyor prepares a depreciation schedule estimating the construction cost and the value of depreciable assets, which your accountant uses to claim.

The report fee is itself deductible, and a schedule lasts the life of the ownership rather than needing annual renewal. Whether it pays for itself depends on the age of the property and the eligible construction - a very old property with no qualifying construction and no new plant may not generate enough deduction to justify it.

One honest caveat that is often left out of depreciation marketing: capital works deductions reduce your CGT cost base. Claiming $6,000 a year of capital works reduces the cost base by that amount, so a larger capital gain is assessed on sale. Because of the 50% CGT discount for assets held over twelve months, the deferral is usually still worthwhile - but the benefit is smaller than the annual deduction suggests, and it is not free money.

Depreciation is tax advice territory. Have your accountant confirm what applies to your property and your circumstances.

Frequently asked questions

Can I claim depreciation on a second-hand investment property?

You can generally claim capital works deductions on eligible construction. Deductions for previously used plant and equipment in residential property were removed for investors who acquired after 9 May 2017, though new items you purchase yourself remain depreciable.

What is the capital works deduction rate?

Generally 2.5% a year over 40 years for eligible construction, depending on when the construction was completed. The ATO sets the applicable rates and dates.

Does depreciation affect capital gains tax?

Yes. Capital works deductions claimed reduce the property's cost base, which increases the assessable capital gain on sale. The 50% discount for assets held over twelve months usually means the deferral still works in your favour, but the net benefit is smaller than the deduction suggests.

Do I need a quantity surveyor?

For most properties with depreciable value, yes - a professionally prepared schedule substantiates the claim and the fee is deductible. For a very old property with no qualifying construction and no new plant, it may not be worthwhile.

Related reading

• Negative Gearing: After-Tax Cash Flow Worked Through
• Rentvesting Cash Flow, Calculated
• Investment Property Loans: What Is Different

Sources

• Rental properties - depreciating assets and capital works — Australian Taxation Office
• Guide to capital gains tax — Australian Taxation Office