Depreciation and second-hand investment properties

People are frequently mistaken in assuming that older properties lack depreciation deductions. It’s important to clarify that this is incorrect. Older properties, just like newer ones, can still qualify for depreciation deductions.

While it’s true that older properties may have less depreciation compared to brand new properties, there are many scenarios where owners of older properties can benefit from depreciation deductions. For instance, if the property has undergone renovations or improvements by current or previous owners, the cost of those improvements can be depreciated over their useful life.

In 2023, investors still lack clarity regarding the modifications made to Australia’s depreciation legislation in 2017, which eliminated the ability to claim depreciation on previously used plant and equipment assets in residential investment properties.

To this day, many property investors don’t realise that qualifying capital works deductions – which typically make up 85-90 per cent of a depreciation claim – are unaffected, and that new plant and equipment assets can also be depreciated. The result is that numerous owners of older investment properties overlook the extent of what they can rightfully claim.

Let’s look at the evidence

Data from Rider Accountants Tax Depreciation schedules completed in financial year 2022-23 revealed impressive deductions for all property types.

In financial year 2022-23, Rider Accountants found owners of brand-new properties an average first full financial year depreciation claim of $15,234. In the same year, Rider Accountants found owners of old investment properties an average first full financial year depreciation claim of $5,126.

While this may seem low in comparison, this claim was found in properties with a construction completion date of 1987 and prior, which means that properties more than thirty-five years old without any qualifying capital works deduction for the original build are still generating a yearly deduction of greater than five thousand dollars.

‘Fairly new’ properties built between 2016 and 2020 had a higher average first full financial year deduction of $7,944. The overall total average claim for all properties was $8,925 in the first full financial year.

Table 1 demonstrates the average first full year depreciation claim for properties with a wide range of construction completion dates which were prepared by Rider Accountants in financial year 2022-23.

Table 1: Claims found for Sydney investment properties of different ages

Investors who lack a comprehensive on-site inspection of their rental property are unlikely to be maximising their potential for depreciation claims.

Completing site inspections in second-hand properties provides an opportunity for investors to claim every deduction available.

There are many hidden tax deductions in an investment property, such as wiring, plumbing and even renovations completed by previous owners. By undertaking a thorough site inspection, it becomes possible to identify all eligible assets and accurately determine their depreciable values.

This is especially important in second-hand properties. depreciation data reveals that 66 per cent of investment properties have undergone a qualifying addition or renovation, which can only be determined after a thorough site inspection.

A site inspection also allows for detailed documentation of the property’s condition and assets, which becomes crucial in substantiating the depreciation claim and defending it in the case of an Australian Taxation Office audit.

Both the Australian Institute of Quantity Surveyors (AIQS) and the National Tax and Accountants’ Association (NTAA) support the requirement for site inspections. They know that site inspections help in providing accurate information required for depreciation calculations and prevent any errors or inconsistencies in the claim.

So if you would like Rider Accountants to handle the tax for your second-hand Sydney investment property, book a depreciation report as soon as possible.