Property Depreciation and Negative Gearing: What Australian Investors Should Know (Includes a Duo Tax Report Discount Link)

Owning an investment property involves more than collecting rent and paying
the mortgage. Investors also need to keep accurate records, understand which
expenses may be deductible and separate immediate expenses from amounts that
may need to be claimed over several years.

Property depreciation is one area that is often overlooked. It is also
frequently confused with negative gearing. The two concepts can interact, but
they are not the same thing.

A tax depreciation schedule may help an investor and their accountant identify
eligible deductions relating to the building and depreciating assets. Whether
those deductions are available, and how they should be claimed, depends on the
property, its age, its use, the assets involved and the investor's individual
circumstances.

This article provides general information only. Crest Realty is not a tax
agent, accountant, financial adviser, quantity surveyor or property valuer.
Always obtain advice from appropriately qualified professionals before making
tax, financial, legal or investment decisions.

What is negative gearing?

A rental property is generally described as negatively geared when its
deductible rental expenses exceed the rental income it produces, resulting in
a net rental loss.

Depending on the investor's circumstances and the applicable tax rules, that
loss may be available to offset other income, such as salary, wages or business
income. If there is not enough other income to absorb the loss, the remaining
amount may be carried forward.

The Australian Taxation Office (ATO) explains that a rental property must be
rented or genuinely available for rent before related expenses can generally
be claimed. Expenses must also be correctly apportioned when a property is
partly used privately, rented for only part of the year, owned jointly or
financed through borrowing that also has a private purpose.

Negative gearing is not a guaranteed investment benefit. A tax deduction
usually offsets only part of an expense, and the property owner still carries
the underlying cash cost and investment risk. Capital growth, rent, interest
rates, vacancies, maintenance, insurance and the investor's ability to hold the
property all remain important.

For current guidance, see the ATO's
residential rental property information.

What is a property depreciation schedule?

A property depreciation schedule is a specialist report that identifies
potential depreciation deductions for an income-producing property and
provides calculations that an accountant or registered tax agent can use when
preparing a tax return.

The report commonly separates deductions into two broad categories.

Capital works

Capital works deductions may apply to eligible construction expenditure on the
building and certain structural improvements. Depending on the construction
date, use and eligibility of the property, these deductions may be spread over
many years.

Examples may include eligible expenditure relating to:

• the building structure;
• walls, floors and roofing;
• fixed cupboards and built-in components;
• extensions and structural renovations; and
• some external structures and improvements.

The purchase price of the land itself is not depreciable. When reliable
construction-cost records are unavailable, an appropriately qualified
professional may be able to estimate eligible construction expenditure in
accordance with the tax rules.

Plant and equipment

Plant and equipment generally refers to identifiable depreciating assets that
have their own effective lives. Depending on the property and eligibility,
examples may include:

• air-conditioning units;
• appliances;
• blinds and curtains;
• carpets;
• hot-water systems; and
• certain security or access equipment.

The treatment of an item depends on its nature, ownership, use, installation
date and whether it is new or second-hand. It should not be assumed that every
item in a rental property can be depreciated.

The ATO's
rental properties guidance
explains that some rental expenses may be claimed immediately while others,
including eligible capital works and decline in value, are claimed over a
number of income years.

How does depreciation relate to negative gearing?

Depreciation can affect the taxable result of a rental property without
necessarily requiring the investor to make the same cash payment during that
financial year.

For example, a landlord may have rental income and cash expenses such as
interest, insurance, management fees, council rates and repairs. Eligible
depreciation deductions may then be included when the accountant calculates
the property's taxable income or loss.

This can increase a tax loss or reduce taxable rental income, but it does not
automatically mean that a property is a good investment. It also does not mean
that every property should be negatively geared.

The actual result depends on:

• the investor's taxable income and ownership structure;
• the property's rental income and genuine availability for rent;
• interest and other allowable expenses;
• eligible capital works and depreciating assets;
• private use or non-commercial rental arrangements;
• previous claims and renovation history; and
• current tax law.

A depreciation schedule supplies property-specific calculations. The
investor's accountant or registered tax agent decides how those calculations
apply to the tax return and the investor's broader circumstances.

Important rules for second-hand residential assets

Rules introduced from 1 July 2017 limit deductions for the decline in value of
certain second-hand depreciating assets in residential rental properties.

This can be particularly relevant when an investor buys an established
property containing previously used appliances, carpets, blinds or other
assets. Exceptions may apply, and eligible capital works deductions may still
be available even where deductions for some second-hand plant and equipment
are restricted.

New assets purchased and installed by the investor may be treated differently
from existing second-hand assets acquired with the property.

Because the rules are fact-specific, investors should avoid estimating claims
from a generic online list. A qualified quantity surveyor can prepare the
property report, while an accountant or registered tax agent can advise how it
should be used.

Which properties may benefit from a depreciation review?

It may be worth obtaining professional advice if you:

• purchased a new or established investment property;
• own a house-and-land package or newly completed apartment;
• completed a renovation, extension or substantial improvement;
• replaced appliances, flooring, window coverings or other assets;
• converted a former home into a rental property;
• have an older property but do not know its renovation history;
• bought a commercial investment property;
• have never obtained a depreciation schedule;
• believe an existing schedule no longer reflects the property; or
• need to establish whether missed claims can still be addressed.

An older property should not automatically be dismissed. Later renovations,
extensions and eligible assets may still be relevant. Equally, a new property
does not guarantee a particular deduction.

When should a depreciation schedule be reviewed?

A schedule is often prepared after an investment property is acquired and
becomes available for rent. It may need to be updated when the property changes
materially.

Review may be appropriate after:

• a major renovation or extension;
• installation or replacement of significant assets;
• removal or disposal of listed assets;
• changes between private and income-producing use;
• a change in ownership;
• substantial building work; or
• discovery that the original report contains incomplete information.

Keep purchase documents, settlement records, building contracts, invoices,
renovation details, plans and previous schedules. Your accountant and quantity
surveyor can advise which records are relevant.

Depreciation schedules and valuation reports are different

A depreciation schedule and a property valuation report serve different
purposes.

A depreciation schedule focuses on potential tax depreciation deductions for
an income-producing property. A valuation report generally establishes the
market value of a property, often at a specified date.

A formal property valuation may be needed for purposes such as:

• capital gains tax calculations;
• stamp duty or property transfers;
• retrospective or historical value evidence;
• SMSF audit and financial reporting;
• estate or family-law matters; or
• other legal, lending or compliance requirements.

One report should not be treated as a substitute for the other. Confirm the
required report type with your accountant, solicitor, auditor or other adviser
before ordering.

Exclusive Duo Tax fees for Crest Realty clients

Crest Realty clients can use our dedicated Duo Tax referral link to access the
following exclusive fees.

Tax depreciation schedules

Property valuation reports

These reports may include CGT, stamp duty and retrospective valuation purposes,
subject to the client's requirements.

SMSF audit valuations

Access Crest Realty
client pricing with Duo Tax →

Fees were supplied to Crest Realty for eligible referred clients and include
GST where stated. "From" and "starting from" fees may vary according to the
property type, location, complexity, inspection requirements, valuation date
and scope of work. Confirm eligibility, inclusions, turnaround time and the
final quoted fee directly with Duo Tax before ordering.

Referral disclosure: The link above is a Crest Realty affiliate/referral
link. Crest Realty may receive a referral benefit if you use it. This does not
replace independent advice, and you are free to choose any qualified quantity
surveyor, valuer or service provider.

Before ordering a report

Ask your accountant, registered tax agent, solicitor, auditor or adviser which
report is appropriate and what date or purpose the report must address.

Depending on the service, you may need:

• the property address and ownership details;
• purchase and settlement dates;
• the date the property became available for rent;
• building age and construction information;
• renovation and improvement details;
• asset-purchase invoices;
• an existing depreciation schedule;
• the required valuation date; and
• the purpose for which the report will be used.

Providing the correct instructions at the beginning can help avoid ordering
the wrong type of report or needing additional work later.

Final considerations

Property depreciation can be an important part of accurate investment-property
record keeping. A professionally prepared schedule may identify eligible
deductions that are difficult to calculate from purchase documents alone.

However, depreciation should not be treated as a reason to buy an unsuitable
property or deliberately create a cash-flow loss. Negative gearing,
depreciation, capital growth and cash flow are different parts of the
investment decision.

Before acting:

1. confirm that the property is genuinely available for rent;
2. keep complete purchase, renovation and asset records;
3. ask a qualified professional whether a depreciation schedule is suitable;
4. have your accountant or registered tax agent review all claims; and
5. obtain personal financial and legal advice where required.

For help with your investment property's leasing or ongoing management,
explore Crest Realty's
property management services
or contact our team.

General information and affiliate disclaimer

This article is general information only and is current at the review date
shown above. It does not constitute tax, accounting, financial, investment,
legal, valuation or quantity-surveying advice. Tax treatment depends on the
law and each person's circumstances. Seek advice from appropriately qualified
professionals and check current ATO guidance before acting.

Duo Tax is an independent third-party provider. Crest Realty does not prepare,
verify or warrant Duo Tax reports and is not responsible for determining
whether a report, deduction, valuation or service is appropriate for you.
Service descriptions, eligibility, fees and turnaround times should be
confirmed directly with Duo Tax. Crest Realty may receive a referral benefit
when the affiliate link in this article is used.