How To Claim Depreciation On Investment Property In Sydney?

For Sydney property investors, claiming depreciation on your investment property is a powerful strategy to reduce your tax burden and potentially improve your rental yield. Depreciation allows you to deduct the gradual wear and tear of your property and its assets from your taxable income. In this blog, we’ll delve into the specifics of claiming depreciation for Sydney investment properties, equipping you with the knowledge to optimise your tax deductions.

Understanding Depreciation: Two Sides of the Coin

There are two main components to claiming depreciation on your Sydney investment property:

• Capital Works Deductions: This applies to the building itself, essentially recognising the property’s decline in value over time.
• Plant and Equipment Deductions: This focuses on depreciable assets within the property, like carpets, appliances, and hot water systems.

Capital Works:

• Eligibility: Properties constructed after 15 September 1987 qualify for capital works deductions.
• Rate and Duration: The deduction rate depends on the construction date. Properties built after this date generally allow deductions at 2.5% annually over 40 years.
• Important Note: You cannot claim depreciation on the land itself, as land typically appreciates in value.

Plant and Equipment:

• Eligible Assets: A wide range of removable or detachable items qualify, including ovens, dishwashers, curtains, blinds, and light fittings.
• Deduction Rate and Effective Life: The Australian Taxation Office (ATO) assigns an “effective life” to each asset type, determining the depreciation rate. For instance, carpets might have a five-year effective life, allowing a 20% annual deduction.

Maximising Depreciation Claims with a Tax Depreciation Schedule

To ensure you’re claiming all eligible deductions, a tax depreciation schedule is highly recommended. Prepared by a qualified quantity surveyor, this report details the depreciable value of your property’s building structure and individual assets. Here’s why a schedule is beneficial:

• Accuracy and Comprehensiveness: A professional surveyor ensures you claim the correct deductions based on ATO guidelines and the property’s specific features.
• Identifying All Depreciable Assets: An experienced eye can spot hidden depreciation opportunities you might miss, like built-in cabinetry or window treatments.
• Long-Term Benefits: A depreciation schedule is a valuable record for future reference and can be updated to reflect renovations or replacements.

The cost of a tax depreciation schedule typically ranges from $300 to $800, but the potential tax savings can significantly outweigh this initial investment.

Claiming Depreciation at Tax Time

Once you have a tax depreciation schedule, claiming depreciation becomes a straightforward process:

1. Gather Records: Keep your depreciation schedule, property purchase records, and receipts for any capital works or asset replacements.
2. Tax Return Preparation: When lodging your tax return, include the depreciation deductions outlined in your schedule. You can claim depreciation through a registered tax agent or use the ATO’s online portal.

Additional Considerations for Sydney Investors

• Older Properties (Built Before 15 September 1987): Capital works deductions are not available for these properties. However, you can still claim depreciation on plant and equipment.
• Divisions and Renovations: If you’ve subdivided your property or undertaken renovations, the depreciation picture can change. Consulting a tax professional is recommended to navigate these situations.
• Negative Gearing: Strategic depreciation claims can help increase negative gearing benefits, a common strategy for Sydney property investors.

The Takeaway: Knowledge is Power

Understanding and claiming depreciation on your Sydney investment property is a powerful tool to reduce your tax liability and potentially improve your cash flow. By utilising a tax depreciation schedule and consulting with qualified professionals, you can ensure you’re maximising your deductions and optimising your investment returns. Remember, the information in this blog is for general guidance only. It’s crucial to seek professional advice from a tax agent or qualified quantity surveyor for personalised recommendations specific to your Sydney investment property.