One of the tax benefits of owning an investment property is the ability to write off (or depreciate) the cost of capital assets included within the property as a deduction from your overall income from the property.

However, changes a few years ago have adversely affected the tax benefits available to property investors in relation to depreciation.

So, first things first; what is depreciation? Well, depreciation is a generic accounting term used to describe how an asset declines in value over time. 

Depreciation of assets within an investment property are based on the ‘useful life’ of the asset, or the number of years the asset is expected to be in use. There are two ways of working out the useful life of an asset. First of all, the ATO annually produces tables of indicative useful lives for a comprehensive list of assets, including almost everything you can imagine being found within an investment property. The current one is TR 2022/1( TR 2022/1 - Income tax: effective life of depreciating assets (applicable from 1 July 2022) Ruling (Published on 29 June 2022) | Legal database (ato.gov.au)).

Alternatively, if you disagree with the ATO’s view, you can self-assess the useful life of an asset, provided you can substantiate your view to the ATO. 

Amongst the assets that can be depreciated are items such as:

• Carpet
• Ovens
• Cooktops
• Dishwashers
• clothes dryers
• blinds and curtains
• air conditioners
• heaters
• hot water systems

Depreciation is based on the acquisition cost of the item, which may vary in value depending on the type of asset. Carpet, for example, can vary in price and quality, and this will be reflected in the depreciation allowance.

Where things become more complex is that restrictions on the depreciation of second hand assets were introduced in relation to property investors with effect from 9th May 2017. Essentially, unless you are carrying on a business of property investing (which excludes the vast majority of taxpayers with a small portfolio of properties) or are an excluded entity (such as a company), you cannot claim for depreciation of second-hand plant and equipment in rental premises used for residential accommodation.

These changes apply to second-hand plant and equipment acquired at or after 7.30 pm (AEST) on 9 May 2017 unless you acquired them under a contract entered into before this time.

Additionally, you cannot claim for plant and equipment installed on or after 1 July 2017 if you have ever used it for a private purpose.

The following table sets out when depreciation deductions can be claimed for assets in residential investment properties:

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Talk to a tax agent

The availability or otherwise of depreciation deductions for second hand assets, in either new or second hand properties, is a source of confusion for many taxpayers so make sure you talk to your tax agent, at H&R Block, to understand what you’re entitled to claim and what you’re not entitled to claim. With the ATO targeting excessive or incorrect deductions for rental properties, it certainly pays to double-check that your claims are correct.

The views expressed in this article are an opinion only and readers should rely on their independent advice in relation to such matters. 

Related Reading:

What to look for in an investment property

Ways to build your investment property portfolio - BMT

The benefits of a Pay As You Go withholding variation - BMT

Partial year deductions