Why Depreciation Matters for Property Investors
The main game for property investors is usually targeting dwellings that increase in value over time. However, investors of new property can also use depreciation to their advantage.
The Australian Tax Office (ATO) recognizes that buildings and their internal assets lose value over time. To account for this, it allows investors to claim wear and tear on a new property as a tax deduction.
Boosting ROI Through Tax Deductions
Wise investors who purchase new apartments or build new dwellings can use depreciation as a financial strategy to lower their tax liability. This leads to improved overall returns and greater cash flow—resources that can be reinvested or used to cover other expenses.
To buy unregistered land, you sign a Contract of Sale with a developer who undertakes the development (such as road infrastructure and connecting all services) and registration of the land for you. This requires a deposit, and you later pay the balance once the land is registered. Lenders for land loans won’t approve funds until the land is registered because they first require a land valuation, which can only be done after registration.
Understanding the Two Types of Depreciation
Depreciation for new investment properties falls into two key categories:
1. Capital Works Deductions
Capital works refer to the construction elements of a new property—things like:
- Walls
- Roofs
- Doors
- Fixtures
These deductions cover the building cost of the investment and are claimed over a set time period at a rate defined by the ATO.
Example:
If a new investment property costs $300,000 to build and the depreciation rate is 2% over 40 years, you can claim $6,000 annually as a tax deduction for each of those 40 years.
2. Plant and Equipment Deductions
This category covers removable or mechanical items within the property that will eventually wear out. Examples include:
- Dishwashers
- Carpets
- Window blinds
The ATO sets the depreciation rate for each item based on its effective lifespan. Different assets have different rates depending on how long they’re expected to last before replacement is necessary.
Key Benefits for New Property Investors
Depreciation is a particularly powerful tool for investors in new properties, offering:
- Higher initial deductions
- Full access to capital works deductions
- The ability to claim plant and equipment at full value
Since everything is brand new, investors can claim depreciation across the full lifespan of the assets—maximizing deductions and enhancing their investment returns.
