A profile of residential property investment across Australia has revealed that more than 60 per cent of residential property investors are currently taking a loss on their rental properties.

While the report found 61.9 per cent of residential property investors declared a net rental loss according to the latest Australian Taxation Office (ATO) data, cash flow for many of these owners is still an achievable goal if depreciation is claimed.

BMT Tax Depreciation has found that 80 per cent of property investors fail to maximise the deductions available through depreciation. Although depreciation will technically add to the loss, it is considered a non-cash deduction. This means an investor does not need to spend any money to be able to claim it. By claiming depreciation, investors can potentially turn a negative cash flow scenario into a more positive one, thus putting more money in their pockets.

Are you eligible for depreciation deductions?

Owners of all types of investment properties, both residential and commercial, are able to claim depreciation deductions, with the ATO stipulating that the property must be income producing in order to make a claim.

Depreciation, which relates to the wear and tear of a property, is split into two distinct categories:

  • Division 43 capital works allowance
  • Division 40 plant and equipment depreciation

The capital works allowance relates to claims for the wear and tear that occurs to the structure of the property. This includes any structural improvements that may have been made during a renovation.

There are some rules relating to the construction commencement date that investors should be aware of when determining what they can claim.

As a general rule, any residential building where construction commenced after September 15, 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to 40 years.

Often, owners of properties where construction commenced prior to the 1987 date think they are not eligible for depreciation, but this is not necessarily the case. Owners of older buildings should still find out what deductions are available, as often these buildings will have undergone some form of renovation which could result in capital works deductions for the owner.

The second depreciable element of a property is the plant and equipment assets contained both inside and outside the property. Investors can claim deductions for the wear and tear on a significant number of easily removable fixtures and fittings found within the property. There are more than 6,000 assets recognised by the ATO, with some common examples including carpets, curtains and blinds, air conditioners, door closers, range hoods and dishwashers.

Unlike capital works deductions, deductions for plant and equipment assets are not dependent on the property’s construction commencement date. The ATO provides an individual effective life and depreciation rate which should be used to determine the deductions which can be claimed, and the assets effective life will reset from the date of settlement.

Cash flow before and after depreciation claims

Let’s look at a before and after example for one investor who currently has a negative cash flow scenario and the difference claiming depreciation could make.

The investor purchased a new house for $632,000 and was receiving a rental income of $485 per week or $25,220 per annum. Yearly expenses, including interest, rates, property management fees and repairs and maintenance totalled $31,730. Without depreciation, they are experiencing a loss of $6,510 before tax and $4,101 after tax. That’s a loss of $79 per week.

The investor consulted with a specialist quantity surveyor who found they could claim $15,500 in depreciation for the new house. The following table demonstrates the investor’s cash flow with and without the depreciation claim:

property deductions

By claiming depreciation, this investor was able to turn their loss of $79 per week into an income of $31. This was a difference to their cash flow of $110 per week and a difference to their tax refund of $5,735 in the first financial year.

To maximise depreciation for an investment property, it is recommended to speak with a quantity surveyor. These experts are recognised by the ATO under Tax Ruling 97/25 as one of a few select professionals with the knowledge necessary to estimate construction costs for depreciation purposes.

Investors who haven’t been claiming or maximising depreciation can request the previous two financial years’ tax returns to be amended.

It’s always worth making an enquiry as the returns far outweigh the costs of obtaining a depreciation schedule. The fee for the schedule is also tax deductible.