Does depreciation apply to older properties?
Sometimes referred to as ‘capital works deductions’ by ATO, many property investors think depreciation only applies to new properties.
However, investor owners of older properties, shouldn’t be so quick to dismiss it, as they could be missing out on some of the associated tax breaks association.
What is depreciation?
Depreciation is calculated and projected (or forecasted) over several years, and it’s split into two types:
- Depreciation on assets
Like a car, there are certain items in your property which will lose value over time because they become worn out and eventually need to be replaced.
You can claim depreciation on items costing more than $300 such as:
- floating timber flooring
- carpets
- curtains
- appliances like a washing machine or fridge
- furniture
The depreciation deductions are for the decline in value over the item’s effective life. This is how long the asset can be used by any entity for a taxable purpose, and it takes into consideration wear and tear you reasonably expect, assuming that it will be maintained in reasonably good order and condition. There are more details about effective life, including lists of items you can claim on and how long they should last on the ATO website.
- Capital works deductions
This is the construction costs to the building itself. For example, items like brickwork and concrete. The length of time the ATO says a building lasts before it needs replacing is 40 years, so this is the length of time the depreciation is calculated.
Depreciation on older properties
Depreciation should be in your investment property strategy regardless of the age of the property; while, the depreciation tax breaks are higher on newer properties they are still available on older ones.
We all love a bargain and like to save money, but it’s worth noting, you can only claim the decline in value of new depreciating assets but not for second-hand or used assets, and you can only claim depreciation on items you personally bought, not what the previous owner put in, even if it hasn’t been used. For example, the previous owner may have put a new carpet in the empty property in order to better present it for selling.
But if you are renovating the older property, this will be classed as a capital works deduction, so once again, owners of older properties will be able to claim against this.
The evidence
We are not endorsing BMT Tax Depreciation Quantity Surveyors, and there are plenty of other professional depreciation specialists around however they have some good data to show the benefits of depreciation on older properties.
BMT Data
In the financial year 2022-23, BMT found owners of brand new properties an average first full financial year depreciation claim of $15,234. In the same year, BMT found owners of old investment properties an average first full financial year depreciation claim of $5,126.
Notably, this claim was found in properties with a construction completion date of 1987 and prior. So, properties more than 35 years old without any qualifying capital works deduction for the original build are still generating a yearly deduction of greater than $5,000.
Newer properties (built between 2016 and 2020) had a higher average first full financial year deduction of $7,944. The overall total average claim for all properties was $8,925 in the first full financial year.
This table show the average first full year depreciation claim for properties with a wide range of construction completion dates which were prepared by BMT in financial year 2022-23.
| Requested schedule types | ||
| Construction dates | Average first full year deductions | |
| Pre –1987 | $5,126 | |
| 1987 – 2002 | $5,562 | |
| 2003 – 2015 | $6,823 | |
| 2016 – 2020 | $7,944 | |
| 2020 – 2022 | $15,234 | |
| All | $8,925 |
As BMT points out in this article, there are many hidden tax deductions in an investment property, such as wiring, plumbing and even renovations completed by previous owners.
So even if you have purchased an older property, it’s worth getting a professional thorough site inspection to identify all eligible assets and accurately determine their depreciable values.
For more information on Rental expenses you claim over several years, visit the ATO website and talk to your accountant.
If you have any queries at all about property investment and want to know more about how our property management services can assist you, give us a call on 02 4954 8833 or send us an email to mail@apnewcastle.com.au.