Rental Property Depreciation Rates
Property investors should be aware of the rental property depreciation rates that apply to their properties. The ATO decides how long something will last with fair use. They call this the Effective Life. The Effective Life then drives the % depreciation rate that can be used.
Residential buildings, if constructed after September 1987, have an Effective Life of 40 years. Buildings depreciate at 2.5% every year for 40 years – 2.5% x 40 years = 100%. This also applies to structural renovations carried out after September 1987 to buildings of any age. So if you have a residential property that was built in 1990 and renovated in 2010, you depreciate the original building at 2.5% until 2030 and the renovation at 2.5% until 2040. If you have a 1960s property that was renovated in 2000, you depreciate the renovation only until 2040.
This deduction for buildings is called the Special Building Write-Off.
Rental Property Depreciation rates for assets are more complicated.
Assets are the items in a property that will wear out more quickly than the building. They have a shorter Effective Life and therefore a higher % depreciation rate than the building depreciation rate.
Unfortunately, some people don’t realise the rental property depreciation rates for Assets differ from buildings. Uninformed property investors get less depreciation.
Carpet, for example, suffers a lot of wear and tear and has an Effective Life of 10 years. An oven has an Effective Life of 12 years. Artificial grass has an Effective Life of 5 years. There are hundreds and hundreds of Assets that can be found in residential rental properties.
Assets can be depreciated using the Prime Cost method or the Diminishing Value method. It’s hard to explain the difference simply, but Prime Cost spreads the depreciation evenly, whereas with diminishing Value there is more depreciation in the early years. Just about every investor uses the Diminishing Value method.
Depreciation Rates for Low Value assets
Trust the ATO to make things complicated. When assets fall below a certain value, you’re allowed to put them in a Low Value Pool. Once they’re in the low value pool the depreciation rate is high and the assets depreciate even more rapidly.
Do renovations affect rental property depreciation Rates?
If you buy a property that has been renovated, or if you renovate a property, the depreciation rate for the structural work is 2.5% and the work starts depreciating from when it is completed.
How to look up depreciation rates for rental properties.
If you’re super keen to know the depreciation rates for specific assets, the ATO produce a Rental Property Guide every year. It lists the depreciation rates for every asset imaginable. While it might be interesting to look up the depreciation rates, most property investors will leave the application of the depreciation rates to the experts – Quantity Surveyors.
Can you just use the Capital Works Depreciation Rate?
Some investors and the occasional accountant try to work out depreciation deductions without using a Quantity Surveyor. It’s a complicated business and they lack the tools and knowledge Quantity Surveyors use. They often simply bundle everything up and use the capital works depreciation rate of 2.5%.
Applying that capital works depreciation rate across the board creates a few problems. It means much lower depreciation deductions for many properties, which is great for the ATO, not so great for the investor. It also means assets will depreciate for years after they should be worth nothing.
Leave it to the experts; get a Depreciation Schedule from a specialist Quantity Surveying firm like Depreciator. Call 1300 66 00 33 now to enquire about your investment property