How Property Depreciation Works

There are two main types of depreciation you can claim each year for your investment property on your tax return.

1. Construction Costs
2. Fit-Out Costs

There are two methods of claiming:

1. Diminishing Value Method
Under the diminishing value method the deduction is calculated as a percentage of the balance you have left to deduct. The formula for calculating depreciation using the diminishing value method is:

Properties settled pre 10th May 2006

Opening undeducted cost

X

Days owned 365

X

150% Plant’s effective life (in years).

Properties settled on or after 10th May 2006

Opening undeducted cost

X

Days owned 365

X

200% Plant’s effective life (in years).

2. Prime Cost Method
Under the prime cost method the deduction for each year is calculated as a percentage of the cost. The formula for determining the amount of depreciation deduction under the prime cost method is:

Properties settled pre 10th May 2006.

Cost

X

Days owned 365

X

100% Plant’s effective life (in years).

Which Method of Claiming is Best???

Depends...

Short Term Investment (0-5 yrs) > Prime Cost probably better suited.
Long Term Investment (5yrs +) > Diminshing Value

That is, if the owner purchased the property for the purposes of a short term investment and planned to sell it in approximately five years time, the DV rate would be a more attractive option to take, as it provides higher returns over the earlier years. If you claim using the Prime Cost Method (PC), you are claiming a lower but more constant portion of the available deductions over the life of the property. If the owner was intending to retain ownership for a longer period of time then the PC option may be more suitable, as it provides a constant projection of what the investor’s tax deductions will be.

What is pooling?

Low Cost pool - A low cost asset is a depreciable asset that has an opening value of less than $1000 in the year of acquisition.
Low Value Pool - A low value asset is a depreciable asset that has a written down value of less than $1000. That is, if the opening value of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less depreciation in year 1 less depreciation in year 2 etc) is now less than $1000. Assets meeting this classification are placed in an itemised pool.
Pooling is used in conjunction with the diminishing value method to maximise deductions in the first 5 years of the depreciation schedule.

Can I claim renovations done by the previous owner?

Yes. Anything in the property that is part of a previous renovation should be estimated by your Quantity Surveyors and depreciated accordingly. This includes items that are not obvious e.g. New plumbing, water proofing, electrical wiring etc.

What is the difference between plant and equipment and the building write-off allowance?

Plant and equipment items are basically items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items also includes items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include( but are not limited to):

• Hot Water Systems
• Carpets
• Blinds
• Ovens
• Cooktops
• Rangehoods
• Garage Door Motors
• Door Closers
• Freestanding Furniture
• Air Conditioning

The building write-off allowance is based on historical building costs and includes things such as the bricks, mortar, walls, flooring, wiring etc