Depreciation in property investment
Depreciation allows investors to claim tax deductions for fixtures and fittings as they get older and wear out. This can include items within the building such as ovens, dishwashers, carpet and blinds, as well as the building itself such as concrete and brickwork. Even though your property may go up in value on the market, you can still claim depreciation costs against your income.
Until 2017, Australian investors could claim depreciation on new and used homes. But since then, depreciation can only be claimed on assets in new homes or new assets installed in an older home. This means that generally, brand new off-the-plan homes will have far more scope for claiming depreciation when it comes to tax time. But first thing is first – how does depreciation fit into your wealth building journey?
After purchasing a property – particularly new-build a new-build – the building itself and the fixtures and fittings will gradually depreciate. This doesn’t mean they will get worse (after all, a bit of old-charm character and features usually serves a property well) but a shiny new counter top might get a few scratches, there may be some wear and tear in the carpets, and the building itself might need a few repairs as the years go by. This means that, on-paper, the building and contents themselves are depreciating in value since your purchase.
Land value gains
So, where does the profit come from in property investment? It’s largely from the land that property sits on. The value of the land itself is likely to respond to what is happening in the surrounding area. If you get a brand new train station, if new businesses come to your area, or the local school gets an excellent rating, things are looking up for the value of your land. If a new airport opens next door? Then this may have the opposite effect. But the lesson here is that the land your property sits on is typically the key to your gains during an investment.
Income tax savings
So, what does the depreciation of your building and fixtures mean for your wealth? Well, depreciation is one of the expenses that you can claim through tax deductions. Therefore, you can use these depreciation costs to reduce the amount of tax you pay on your income each month – alongside other expenses such as loans and interest, the costs of managing the property, council and (some) utility bills, landlord insurance, maintenance and repair cost and accountant’s fees. This all fits into wider discussions on how you can use property investment to minimise your tax bill – for more information, visit our dedicated property investment and tax page.
Chris Christofi discusses depreciation
Hear from Reventon founder and CEO Chris Christofi as he discusses depreciation. For more videos like this packed with useful property and finance insights, visit our video hub
Talk to us about depreciation
Whether you have an investment property or you’re thinking of purchasing one, it makes sense to speak to a professional to get advice about depreciation, income tax, and how you can use your property most effectively in your wealth-building journey. At Reventon, we can do just that – what’s more, you can gain a personalised investment plan for the future tailored to your goals and needs. It’s free and there’s no obligations, so there’s no reason not to book your consultation today.