Why Rental Property Depreciation Schedule?

History and legislation.

The government introduced the Rental Property Depreciation deduction in 1985 and legislated it through the Australian Tax Office. The new legislation was designed to encourage the construction industry to increase residential property construction and provide rental accommodation for the increasing population.

The legislation allowed property investors to claim large non-cash deductions, which increased rental expenses.

Any residential property constructed post-July 17, 1985, qualifies for a 4% construction deduction and capital works deduction (Division 43).

On September 16, 1987, this deduction was reduced to 2.5%. The new legislation provided investors with a deduction for plant and equipment (Division 40), not only building works.

The amount of depreciation deductibles depends on several factors, including the timing of settlement for residential rental property, the size and quality of construction, whether the property was renovated by a previous owner, and if new plant and equipment were acquired after settlement. The rental property deduction increases property cash flow, and thus, this should be maximised.

The deductible amount depends on the following:

1. The Timing of Settlement for Residential Rental Property: From May 9, 2017, second-hand “not new” properties do not qualify for a Division 40 deduction unless the property was substantially renovated. Brand-new properties and properties owned by a company are exempt.

2. The size and quality of construction, along with being a new or extensively renovated property, will provide a more significant deduction. The taxpayer can claim both Division 43 (capital works deduction) and Division 40 (Plant and Equipment).

3. If the property was renovated by a previous owner and the previous owner provided information on the construction costs during the settlement, the new owner must use these costs.

4. If the new owner acquires new plant and equipment after settlement, and the new asset or item is ready to be used by tenants, the Division 40 items deducted will be available according to standard rules.

5. Residential properties that are older, not renovated, and built before 17th July 1985 will not be eligible for the Division 43 or Division 40 deduction.

6. Primary production and business/commercial properties will provide a high tax deduction

Maximizing rental property deductions through depreciation allows property investors to increase their property cash flow.