As a building gets older, items wear out; they depreciate. The Australian Taxation Office (ATO) allows investors to claim this depreciation as a deduction; however a large number of property investor’s complete additions or alterations to their investment properties each year, but many of them are unaware of how these renovations will affect the deductions they can claim.

Below are five facts for property investors to help them to understand property depreciation and ensure the maximum deductions are claimed.

1. Get a depreciation schedule before renovating

Renovations can provide deductions over and above those received during a normal depreciation claim. This is because the owner can claim a deduction for any depreciable assets removed and disposed of during a renovation. This process, called ‘scrapping’, allows investors to claim the remaining depreciable value for assets removed as a deduction in the year the item is ‘scrapped’. To be eligible the property must be income producing before the renovation takes place. A site inspection and tax depreciation schedule should also be completed before any items are removed and work begins to allow the Quantity Surveyor to take photos and value the items contained within the property.

2. Install assets that maximise future deductions

Selecting which assets to replace during a renovation can make a difference to future deductions. This is because each asset’s depreciable value is calculated based on its individual effective life. For example, deductions available in the first full year depreciation claim for carpets, floating timber floors and tiles differ.

3. Update your schedule after renovations

A second tax depreciation schedule should be prepared after a renovation to show any removed assets identified in the original schedule and the remaining depreciable amount that can be claimed for these items as an immediate deduction. The new schedule will also detail depreciation deductions available for all newly installed plant and equipment assets or capital works expenditure as well as the depreciation deductions for any original assets remaining for the life of the property (forty years).

4. Prior to 1985

One common misconception investors have is that they cannot claim depreciation on older properties. This arises due to limitations the ATO placed on eligibility for capital works deductions (depreciation for structural components of a property). ATO legislation advises that owners of residential properties built before July 1985 cannot claim capital works deductions. However, depreciation of plant and equipment is not limited by age. It is the condition and quality of each item which contributes to the depreciable amount. Therefore owners of older properties can claim this depreciation.

5. Renovations by previous owners

Often when an investor purchases an older property, at some stage since the building’s original construction, renovation work may have been completed. Although the ATO restricts claiming capital works deductions for properties constructed before 1985, they can claim capital works for renovations completed after this date, even if the work was completed by a previous owner. Quantity Surveyors will discover any previous renovations, even less obvious ones like new plumbing or electrical wiring, during a site inspection of the property.