Tax depreciation is a deduction against assessable income whereby an investor can reduce the amount of tax payable. For example, investing in a residential property for income producing purposes may attract tax depreciation. A cash positive situation for your rental property results when an investor utilises the benefits and advantages of effective tax depreciation.
Crucial to any investment property is the need to reduce assessable income and therefore reduce tax payable.
For example, if you earn $90,000 a year from your employer and an additional $35,000 a year from say, two rental properties, your depreciation on both properties in any given year may be around $24,000.
Taking into account additional negative gearing factors such as interest on mortgage, repair and maintenance etc, your adjusted taxable income is:
- Income $90,000 + $35,000 (salary plus rental income)
- Less $24,000 (non cash depreciable deductions)
- Less $37,500 (cash deductions for interest on mortgage etc)
- Total $63,500 (adjusted taxable income
Types of depreciation available
An investor is able to claim for two distinct types of building related depreciation.
Capital Words deductions for buildings and structures (Division 43)
These deductions are only available for residential properties built after 18 July 1985 where a flat rate of depreciation can be claimed against a building’s original construction cost. Construction expenditure is determined on the basis of the actual cost incurred in the construction of the building. In addition, these costs may include architectural, engineering, surveying and building fees. Construction expenditure does not include the value of an owner/builder’s contribution (eg. expertise and labour). Furthermore, the cost of acquiring land and costs incurred preparing the site for construction and afterwards landscaping are also specifically excluded.
Plant and equipment allowances (Division 40/42)
Plant and equipment items can be claimed even if the property was constructed prior to 1985. These items may include- appliances, hot water units, carpet, air-conditioning, and numerous other items. They are depreciated at an accelerated rate that is in excess of the flat rate utilised in Division 43. Second hand plant and equipment is also depreciable.