Real Estate Depreciation Tax Benefits

Depreciation is a tax deduction that allows investors to reduce the taxable income generated from their investment properties.

In simpler terms, it is an accounting method that spreads out the cost of an asset over its useful life, reflecting the gradual reduction in value due to wear and tear, deterioration, or obsolescence.

Depreciation can be a powerful tool for real estate investors as it can significantly reduce their tax liability, increase cash flow, and improve overall profitability.

However, understanding how depreciation works and how to leverage it for maximum tax benefits requires a thorough knowledge of tax laws and regulations.

Which is why you need a qualified quantity surveyor to inspect your property

In this article, we will explore the concept of real estate depreciation tax benefits and provide insights into how investors can use this strategy to maximize their returns while minimising their taxes.

What Is Real Estate Depreciation?

Real estate depreciation refers to the reduction in value of a property over time due to wear and tear, deterioration, or obsolescence.

It is an essential accounting method used by real estate investors to account for the decrease in value of their assets over time.

There are various types of depreciation methods used in real estate such as straight-line depreciation, accelerated depreciation, and instant asset write-off. These are known at Division 40 items

Straight-line depreciation is the most commonly used method for items under $1,000 in value.

Accelerated depreciation allows investors to take larger deductions earlier on in the asset’s life while instant asset write-off is for items with a value less than $300.

Another category is the Capital works deductions – known as Division 43. This category covers the structural assets in or on your property.
Items like:

• Paving
• Fencing
• Landscaping
• Swimming Pools
• The building/house
• Sheds… and more

How Does It Work?

When using a tax depreciation schedule, your accountant will be able to mark off the asset deductions as an ‘on paper loss’ against your income.

Here’s what that looks like

Let’s say you get $30,000 per year in rent return.
Well instead of paying tax on all the profit, your tax deductions will reduce the taxable amount each year. Saving you tax and improving your cash-flow

Benefits Of Real Estate Depreciation

Depreciation deductions are among the most significant benefits of real estate ownership.

The Australian Tax Office (ATO) allows property owners to reduce their taxable income by claiming depreciation on their assets over time.

As such, owners can save a substantial amount in taxes each year, which can help improve investment returns.

Additionally, depreciation deductions may be used to offset other income streams or gains from the sale of real estate, further reducing an owner’s tax burden. This is known as Negative Gearing

While the value of these savings may vary depending on several factors such as the property’s age. Old or newly built. The property type. Commercial or residential. The location. Close to the city or regional… They remain an essential aspect of any real estate investment strategy.

Ultimately, investors must consider all the available tax benefits when assessing potential investments to maximise returns.

Property Depreciation Report Cost

A property depreciation schedule is an important accounting tool – so you should expect to pay a reasonable price for it.
Typically, the best priced reports, that are accepted by the ATO are priced between $600-$700

Generally, it is recommended to hire a professional quantity surveyor to prepare your report to ensure compliance with ATO guidelines and avoid any potential legal issues.

Frequently Asked Questions

Can Real Estate Depreciation Be Used To Offset Income From Other Sources?

Depreciation deductions can be used to offset income from other sources, resulting in tax savings.

This is because depreciation allows for a portion of the cost of an asset, such as real estate, to be deducted over its useful life.

This deduction reduces taxable income, which can then be used to offset income from other sources.

Are There Any Limitations To The Amount Of Depreciation That Can Be Claimed?

Depreciation limitations are a crucial aspect to consider when claiming tax benefits for real estate properties. These limitations are set by the ATO regulations and can vary depending on the type of property, its useful life, and the depreciation method used.

It is important to note that while depreciation can provide significant tax implications, exceeding the allowed limit can result in penalties and other legal consequences. Therefore, it is essential to consult with a tax professional to ensure compliance withATO regulations and maximize the benefits of real estate depreciation tax deductions.

Does the type of property affect the depreciation Rate?

Yes, the type of property can indeed affect the depreciation rate.

For instance, commercial and residential properties have different depreciation rates due to their varying useful lives, which are determined by the ATO

How is real estate depreciation affected by renovations or improvements made to the property?

Renovation impact on real estate depreciation is a topic of interest among property owners and investors.

Renovations or improvements made to the property can affect its cost basis, which in turn affects the amount of depreciation that can be claimed over time.

If you carry out renovations on the property, you can claim these costs as tax deductions.
Sometimes, you can even claim the renovations as an instant asset write-off under the repairs and maintenance allowance.

Have any Questions?

Simply get in touch with me here and I’ll personally address any questions you have.

Particularly if you are new to investment property ownership. I’ll happily share some tips with you.

If you found this helpful, you may also find some of my other articles beneficial too. And to see some real life examples of what our clients have been receiving in tax depreciation deductions, check out our Client Portfolio page. But it’s usually best to start at the beginning by visiting our home page

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

Published April 2023