Evaluating the depreciation potential of a property before purchase is a crucial step for investors looking to maximise tax deductions. Depreciation allows you to claim a deduction for the decline in value of the building and its fixtures over time, which can significantly impact your investment's cash flow.
Under Division 40 of ITAA 1997, plant and equipment assets, such as air conditioning units and carpets, can be depreciated. Meanwhile, Division 43 covers capital works deductions, which apply to the building's structural elements like walls and floors. To assess depreciation potential, you need to understand both divisions and how they apply to your prospective property.
A common misconception is that all properties offer the same depreciation benefits. However, the potential varies greatly depending on factors such as the property's age, the quality and type of fixtures, and any recent renovations. Properties built after 16 September 1987 are eligible for capital works deductions, but the plant and equipment depreciation rules changed significantly in 2017. For residential properties acquired after 9 May 2017, you cannot claim Division 40 deductions on previously used plant and equipment.
To see how this plays out, let's consider a 2015-built three-bedroom house in Melbourne, purchased for $750,000. The property includes modern fixtures and quality appliances. With a detailed depreciation schedule prepared by a Quantity Surveyor, you could expect to claim around $10,000 in the first year alone. If you're in the 37% tax bracket, this could reduce your tax bill by approximately $3,700.
In our experience reviewing thousands of properties across Australia, we find that many investors overlook the impact of renovations and the year of construction on depreciation potential. Newer properties or those with recent upgrades often offer greater deductions. Additionally, many investors fail to obtain a professional depreciation schedule, which can lead to missed opportunities for tax savings.
The answer can differ depending on your situation. For example, if you're buying a commercial property, the depreciation rules differ slightly, as they are not subject to the 2017 budget changes affecting residential properties. Similarly, if you're purchasing a property through a self-managed super fund (SMSF), the tax implications and potential deductions might vary. Joint ownership scenarios and properties that have only been partially owned during the year also require specific considerations.
Given the complexity and the potential financial impact, obtaining professional advice is essential. A Chartered Quantity Surveyor can provide a detailed depreciation schedule tailored to your property, while an accountant can help integrate this into your overall tax strategy.