How does investment property depreciation work?

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Sponsored article courtesy of Washington Brown

What is depreciation?

Let’s start right at the beginning. Depreciation is basically a tax deduction available to property investors. Your investment property earns an income (in the form of rent from your tenants). So, as with any activity that produces an income, there are various tax deductions available to you.

Normally these tax deductions are things you’ve spent money on, such as property management fees, council rates and other miscellaneous items. You pay an amount of money, you receive a tax invoice and receipt, and you use that piece of paper to claim a tax deduction when tax time rolls around.

Property depreciation

However, property depreciation is what the tax office calls a ‘non-cash deduction’. This means you don’t physically fork out cash in order to claim a deduction. I have also heard it referred to as ‘on paper deductions’ for the same reason. Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time.

This tax deduction recognises the fact that the building itself will become worn out over time and eventually need to be replaced. This also includes its plant and equipment; for example, air-conditioners, blinds, and carpet, etc. It doesn’t matter that these items were paid for by someone else – a developer or previous owner – you, the current owner, can continue to claim deductions as they continue to depreciate in value.

As with any tax deduction, depreciation basically reduces your taxable income. So if your income was $100,000 for the year, and you claim $10,000 worth of deductions, you only pay tax on $90,000. The table below shows you the difference depreciation can make to monthly returns from your property investment.

property depreciation
Image courtesy of Washington Brown.

Of course, these calculations are for the purposes of illustration only. The exact amounts depend on the age of your property and various other variables. This is all covered in my book, CLAIM IT!

Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now. This blog is an extract from CLAIM IT!  – grab your copy now!

Sponsored article courtesy of Washington Brown

Tyron Hyde
Tyron Hyde

Tyron Hyde is the Owner and Director of Washington Brown, an Australian quantity surveying organisation. Tyron has a Degree in Construction Economics (UTS) and is a Fellow of the Australian Institute of Quantity Surveyors. He began his career at Washington Brown in 1993 as a wide-eyed intern looking for a break in the industry. Twenty-eight years later, he is now the sole owner of Washington Brown Depreciation. With his passion and knowledge of property depreciation, Tyron is a regular speaker at industry conferences and is often quoted in national media.

2 COMMENTS

  1. I never knew that depreciation is basically a tax deduction available to property investors. I have been looking into investing in properties. Thank you for the information on property depreciation.

  2. I never knew that depreciation reduces your taxable income. My sister is thinking of buying some property and she will need to look into that. Thank you for the information and the examples in this article.

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