Purchasing an investment property opens up various tax benefits, primarily through depreciation. Understanding how much you can claim in the first year can significantly impact your return on investment.
First-Year Depreciation Claims on Investment Properties
When you acquire an investment property, you can claim depreciation deductions under two main categories: Division 40 for plant and equipment and Division 43 for capital works. Division 40 covers items like carpets, appliances, and hot water systems, while Division 43 pertains to the building structure itself, such as walls and fixed assets.
For properties acquired after 7:30 pm AEST on 9 May 2017, the ability to claim Division 40 depreciation on second-hand plant and equipment was removed. However, you can still claim Division 43 deductions on eligible buildings, typically at a rate of 2.5% per annum for properties built after 1987. The most common misconception is that all plant and equipment can be depreciated regardless of purchase date, which is incorrect.
How This Works in Practice
Consider a 2012-built 3-bedroom house in Richmond, Melbourne, purchased for $850,000. Assume the plant and equipment component is valued at $50,000 and the capital works at $200,000.
In the first year, you can claim:
- Division 43 (Capital Works): $200,000 x 2.5% = $5,000
- Division 40 (Plant & Equipment): Assuming the plant and equipment are new or qualify under the exceptions, the first-year depreciation might total around $8,000, depending on effective life and usage.
Professional Insight
In our experience, many investors underestimate the impact of depreciation on cash flow. One thing we frequently see is investors failing to obtain a detailed depreciation schedule, which outlines both Division 40 and Division 43 deductions, leading to missed claims. What most investors don't realise is that even older properties may have undergone renovations that qualify for Division 43 deductions. Additionally, ensuring that plant and equipment are properly assessed can lead to significant tax savings, especially if the property is furnished.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation claims can significantly vary based on the property's specifics, renovations, and purchase date. Engaging a Chartered Quantity Surveyor is crucial for obtaining an accurate depreciation schedule. An accountant will also be necessary to integrate these figures into your overall tax strategy.