Investment property capital improvements depreciation

Capital Improvements Depreciation

Can you claimable Capital Improvements as tax Depreciation?

Yes, you can claim virtually every capital improvement as a tax deduction when using a depreciation schedule.

Are you an investor in rental property? And are you looking to make some capital improvements?

Then you need to know about the ATO rules for capital improvements depreciation.

This important tax deduction can help make the most out of an investment property; so it’s vital to understand how it works and the rules associated with it. That way you can make sure you’re fully taking advantage of the deductions available to you.

Capital Improvements Depreciation

Maximising the return on investments, while minimising taxes, requires careful attention to the depreciation of assets.

Capital improvements depreciation is an important factor in determining the amount of depreciation that can be claimed on an asset. Capital improvements are those changes that make an asset more valuable or better suited for a particular purpose. This could include renovations, additions, and other improvements to an asset.

Under ATO legislation, a quantity surveyor is needed to determine the amount that can be claimed. This is because they’re able to accurately assess the cost of the improvements and the amount of depreciation that can be claimed on them.

Improvements to Rental Property

Making improvements to your rental property can be a great way to increase its value and appeal to prospective tenants, so don’t miss out!

When it comes to investment properties, capital improvements such as renovations, additions, or upgrades to plumbing or electrical systems can be used to increase the rent you’re able to charge. These improvements can also be depreciated for tax purposes, meaning you can receive benefits such as negative gearing.

Property Improvements

Enhancing your property not only adds value, but it can also give you tax benefits that put extra money in your pocket.

A freshly painted and modernised home with new appliances is the perfect way to attract high-end tenants.

According to the Australian Taxation Office, improvements made to your property can be depreciated against your rental income. This means that any costs associated with making improvements to your property, such as painting, installing new fixtures, and upgrading appliances, can be used to reduce your taxable income.

This is especially beneficial for landlords in Brisbane and Gold Coast, where property values are increasing and rental demand is high. By making renovations to your property, you can not only increase your rental income but also reduce your tax liability. This will give you more money in your pocket every year.

Renovation Depreciation

When you renovate your investment property – be it commercial or residential – you can claim the depreciation on the renovation costs.

By taking advantage of renovation depreciation, you can lower your taxable income and pocket more money each year! Renovation depreciation is a great way to save money on taxes, and it’s available to those who have made improvements to their property.

It allows you to claim a deduction for the decline in value of any improvements you have made to the property, such as renovations or repairs. This deduction can be claimed over multiple years.

The Australian Taxation Office allows for claimable deductions for any improvements to property that have been made within the last two years plus the financial year you are in.

When claiming this type of deduction, your tax obligation is also to keep detailed records of all work done on the property, including receipts, invoices, and any other relevant documents.

Renovation depreciation can be a great way to save tax and maximise the return on your investments.

Why get a depreciation schedule?

It’s important to claim depreciation deductions on your rental property from the day you first make the property available for rent and income producing.
That’s because the benefits of tax depreciation can dramatically increase your cash flow.

Most investors choose to contact a few quantity surveyors for a tax depreciation quote and estimated claim for deductions.

Virtually every property in greater Brisbane has claimable capital works and many have claimable plant and equipment assets.

Your depreciation schedule – when carried out by a qualified quantity surveyor – will ensure you are maximising your tax deductions each and every year.

Property Inspection

Property investors should insist on their investment property having a full onsite inspection carried out by the quantity surveyors.

This is typically done directly with the property manager to arrange access.

When onsite, the property inspector will assess the capital works items (division 43) as well as any plant and equipment (division 40). Only an extensive onsite property inspection will ensure your depreciation schedule will achieve the maximum deductions for you.

Investment Properties

Investing in property can be a great way to build wealth and secure your financial future, but it’s important to know the tax implications before taking the plunge.

When it comes to investment properties, the Australian Taxation Office offers certain property depreciation deductions for capital improvements and renovations. These deductions can be claimed by the owner of an investment property for any improvements they make to the property, such as renovations, repairs or additions.

This can include plumbing, electrical, carpentry or painting work as well as the costs of materials used in any improvements. It’s important to note that the depreciation deductions can only be claimed for items that are used to maintain the property and increase the value of the investment.

This means that if the improvements are purely for aesthetics or for personal use, they cannot be claimed as depreciation deductions. Additionally, it’s important to keep accurate records of all expenses related to the property, as the ATO may require proof of these costs at any time.

New Properties

Brand new investment properties are eligible for the full extent of tax depreciation deductions on offer through the ATO.

This is due to a 2017 rule change to the ITAA 1997 tax ruling, excluding secondhand plant and equipment items from being claimed as tax deductions.

Thankfully, brand new properties, commercial properties and any residence owned in a company name, are not affected by this rule change.

Second Hand Residential Properties

Older residences are limited in what they can claim in deductions.
Typically, deductions are limited to capital works items within the depreciation schedule.

However, brand new renovations, including plant and equipment items, are tax deductible – so long as the items were purchased brand new and were never used for personal use.

Your tax depreciation schedule will include any brand new items within the calculations, while any older items are included in the capital loss schedule

Australian Taxation Office

If you’re looking to get the most out of your investment property, the Australian Taxation Office (ATO) is an invaluable resource.

The ATO offers a variety of services, such as free online tools and calculators to help you manage your tax obligations . They also provide detailed information on the various laws and regulations that apply to Capital Works Deductions(division 43)


Negative Gearing

Negative gearingis a method of investing where investors borrow money to buy an income-producing asset, such as an investment property, and the income generated is not enough to cover the costs of the loan. The investor makes up the difference by claiming a tax deduction for the losses on their investment.

Although negative gearing has been around for a long time, it has recently become a controversial issue due to the fact that it has allowed investors to benefit significantly from tax concessions, while those who do not have access to the same level of financial resources do not.

This has led to some people calling for the abolition or modification of negative gearing in an effort to level the playing field. However, it is important to note that there are some benefits to negative gearing, such as the ability to benefit from capital growth in the asset over time.

What is Negative Gearing in Australia?

Negative gearing in Australia refers to an investment strategy often used with property where the costs of owning an investment property, including interest on the loan, exceed the income it generates. This operational loss can be used to offset other income for tax purposes, effectively reducing the investor’s taxable income.

This strategy is generally employed with the expectation that the property will appreciate in value over time, eventually leading to a profit despite the ongoing losses.

What to do next

If you have an investment property there are undoubtedly tax deductions available to you. All you need do is speak to your preferred quantity surveyor or a good accountant for personalised advice.

To do this, simply get in touch with us and I’ll personally look over your property via my computer and give you an eyeball estimate of deductions.

In the meantime, you may find value in reading my other articles or checking out the real world results my clients have been getting with their tax depreciation schedules.

This article was written by William Callaghan A.A.I.Q.S.
2nd generation Quantity Surveyor and founder of WRC Quantity Surveying

Published May 2023