How to claim depreciation on your rental property

Many property investors miss out on thousands of dollars in tax deductions simply because they do not know how to claim depreciation. Fortunately, the process is relatively straightforward and cost-effective.

Firstly, if you’re not sure what depreciation is, it refers to the natural wear and tear of your investment property and its assets (carpets, appliances and other features), which the ATO allows you to claim as a tax deduction over time. Submitting your depreciation certificate may help reduce your overall tax costs, and you can use the money you save to invest in upgrades for the property, or to make extra repayments on your loan (the choice is up to you, and individual outcomes vary). 

Here’s how to make sure you’re prepared to maximise your tax deductions:

Step 1: Confirm your property is eligible

Most residential investment properties qualify for depreciation. If the property was built after 15 September 1987, you can typically claim on the building structure. Even older properties may qualify if they have been renovated.

Step 2: Understand what you can claim

Depreciation falls into two categories:

• Capital works: the building structure and fixed elements such as walls, roofs and cabinetry
• Plant and equipment: removable assets such as carpets, blinds, air conditioning and appliances

Keep in mind that plant and equipment rules changed in 2017. If you purchased an established property after this date, you generally cannot claim on previously used assets, but you can claim on any new items you install.

Step 3: Engage a specialist provider

Contact a specialist to prepare your tax depreciation schedule. These specialists are permitted by the ATO to estimate construction costs and asset values accurately. This schedule outlines all eligible deductions over the life of the property, often up to forty years. If you need a referral, reach out to your property manager. 

Step 4: Use the schedule at tax time

Once your tax depreciation certificate is prepared, it is provided to your accountant. They will use it to include deductions in your annual tax return. 

Step 5: Update your claim when circumstances change

If you renovate, add new appliances or furnishings or remove old ones, your depreciation position can change. In some cases, removed assets can be written off in the same financial year. Updating your schedule helps capture these additional deductions.

Step 6: Maximise ongoing benefits

Over time, depreciation can improve after-tax cash flow and help you manage the costs of owning your investment. The good news is you can generally pay for a single certificate and use it for several years.