Tax Depreciation of New vs Old Homes: How You Can Benefit

19 Apr 2017| Posted by: Geoff Baldwin

Claiming tax depreciation on an investment property is nothing new for most seasoned investors, but did you know that the age of the property has an effect on what you can claim? Essentially, depreciation is the estimated decrease in an asset's value over time. You can claim the depreciation of your investment property as a tax deduction each financial year, and many investors go as far as taking depreciation into account prior to investing in a property. Depreciated assets are those that have a limited lifespan and will wear out over time, such as carpet and curtains. With so many household items having an approximate life span of more than a decade, the tax deductions can be considerable.

There are two types of depreciation deductions:

Capital Works Deduction

A capital works deduction applies to the over-arching structural characteristics of a property, such as the walls, roof and concrete floors. If a property was built after 1987, this type of deduction allows you to claim 2.5% of the original cost of construction each financial year, until the property reaches forty years old. If it was built prior to 1987, a capital works deduction does generally not apply.

Plant and Equipment Deduction

A plant and equipment deduction applies to the removable objects within a property that depreciate (wear out) over time, such as water heaters, stoves and blinds. This type of deduction has no bearing on the age of the property.

Depending on the age of the property, either one or both of these deductions can be claimed through tax depreciation schemes.

New Homes

Buying a new home is similar to buying a new car - as soon as it has been purchased, it loses its original value and becomes a second-hand good. New and upcoming processes are always been released in the market, so while your new home is being built, updated products are constantly being released. Both capital works deductions and plant and equipment deductions can be applied to new homes.

Old Homes

As depreciation is such a crucial part of your investment property strategy, it's important to think wisely before purchasing a house built prior to 1987. Plant and equipment deductions can be applied to these kinds of properties. There are also instances where capital works deductions can be made as well, such as structural renovations that have been made to the property after 1987. In other words, despite a property being older, it may still be eligible for years of capital works deductions to come, in the form of depreciation related to renovations and restorations. You can also claim using either the Prime Cost Method, which is the same annual tax deduction for the asset's effective life, or the Diminishing Value Method, which receives a higher tax break sooner by allowing you to accelerate your deductions in the earlier years.