Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 203

Tax deductions are still available for property investors

When looking to purchase an investment property, most buyers consider location, purchase price and tenanting ability, while depreciation is often overlooked. Depreciation can unlock the cash flow potential within an investment property, often resulting in thousands of additional dollars for the investor each financial year.

Announcements made in the 2017 Federal Budget may change some of the eligibility for depreciation, but investors should not overlook where it remains available.

What is depreciation?

As a building gets older, items wear out – they depreciate. The Australian Taxation Office (ATO) allows property owners to claim this depreciation as a tax deduction by any property owner who obtains income from their property.

Capital works deductions are based on the historical cost of the building excluding the cost of all ‘plant’ and non-eligible items. As a general rule, residential buildings which commenced construction after 15 September 1987 and commercial properties after 20 July 1982 are eligible for the capital works allowance.

Although these time restrictions apply, older properties have often undergone renovations. Renovations completed within the legislated dates can also entitle the owner of the investment property to deductions, even if the renovations were completed by a previous owner.

Common depreciable items in an investment property

Plant and equipment items, commonly known as removable assets, are also eligible for depreciation deductions (but see comment on 2017 Budget later). Each plant and equipment item has an effective life set by the ATO which determines the deduction.

Some plant and equipment depreciable items commonly found within a property include hot water systems, dishwashers, carpets, blinds and curtains, light shades, ovens, furniture, range hoods, smoke alarms and cook tops.

Case study

An investor has purchased a property for $420,000 and is receiving $490 per week in rent for a total income of $25,480 per annum. The estimated expenses for the property include interest, rates and management fees, which total $32,000 per annum. The following scenario shows the investor’s cash flow with and without depreciation. A typical $420,000 unit will show a total deduction of $11,500 in the first full financial year.

In this example, the investor uses property depreciation to go from a negative cash flow, paying out $79 per week, to a positive cash flow scenario, earning $3 per week, saving $4,255 for the year.

Claiming depreciation during renovation

When old assets like carpet or hot water systems are replaced during a renovation, the owners may be entitled to claim any residual depreciation as a tax deduction. Property owners should consider a pre-renovation depreciation schedule and update an existing tax depreciation schedule after work is completed to ensure they capture deductions for any new items added during the renovation.

Changes in the 2017 Federal Budget

Under proposed changes, investors who exchange contracts on a second hand residential property after 7:30pm on 9 May 2017 will no longer be able to claim depreciation on plant and equipment assets. Investors who purchase a new property will be able to continue to claim these items as previously.

We are currently speaking with government to further understand the intricacies relating to the proposed changes.

Claim property depreciation this financial year

To maximise cash flow, investors should engage a specialised Quantity Surveyor to complete a tax depreciation schedule. The fee for a tax depreciation schedule is 100% tax deductible. The schedule will show deductions for the life of the property (40 years) and will ensure the property owner improves the return on their investment.

 

Bradley Beer is the Chief Executive Officer of BMT Tax Depreciation, a leading provider of tax depreciation schedules for investors. This article is general information and individuals should seek their own tax advice.

RELATED ARTICLES

Maximising your property tax depreciation and claims

EOFY and new depreciation rules for property

What tax deductions are available to property investors?

banner

Most viewed in recent weeks

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Welcome to Firstlinks Edition 594 with weekend update

It’s well documented that many retirees draw down the minimum amount required and die with much of their super balances untouched. This explores the reasons why and some potential solutions to address the issue.

  • 16 January 2025

Latest Updates

Investment strategies

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

9 ways to fix Australia's housing crisis

Decades of policy failure have induced a fall in housing affordability. Unless painful changes are made, an underclass will emerge in a society that is supposed to boast the one of the world's highest standards of living.

Shares

Australia: why the chase for even higher dividend yields?

Australia boasts one of the world's highest dividend yielding sharemarkets, providing substantial benefits to investors and retirees. Despite this, individuals often stretch for even more yield, to their detriment.

Shares

MIGA – Make Income Great Again

The Australian sharemarket seems to be rewarding a number of unprofitable companies on the promise of future riches. Yet profits and cashflows still matter, as a recent case study of Domino's Pizza shows.

Shares

Mapping future US market returns

Exceptional returns from the US sharemarket over the past decade have driven by sales growth, margin expansion, rising valuations, and dividends. Predicting future returns requires careful consideration of these factors.

Shares

Read this before you go all in on US equities

US equities rule global markets, but history is littered with examples of markets that seemed invincible — until they weren’t. Diversification will be key for investor portfolios going forwards.

Property

What impact would scrapping stamp duty have on housing?

Increasing house prices pose challenges for housing affordability. This investigates the impact of stamp duty on the property market, and how removing the tax could help address several key issues.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.