When renovating a property, whether it’s an investment or rental, knowing how to claim depreciation on renovated items can significantly lower your taxable income and improve your overall return. Depreciation allows you to claim a deduction for the wear and tear on your property’s assets, helping you maximize your tax benefits.
Here’s a straightforward, step-by-step guide to claiming depreciation on renovated property items:
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Step 1: Understand Depreciation Categories
Depreciation usually falls into two categories:
- Capital Works Deductions: These apply to the building structure or permanent fixtures and can be claimed over 40 years at a rate of 2.5% per year.
- Plant and Equipment: These are removable items like appliances, carpets, and furniture which lose value faster. The depreciation period for these items varies but is usually between 5 to 15 years based on the asset.
Step 2: Keep Detailed Records
To claim depreciation on your renovations, you must have clear and accurate records of all the changes, including:
- Invoices for new items or services purchased
- Contractor receipts for work completed
- Before-and-after photos to show the improvements made
- Detailed lists of materials used in the renovations
Having accurate documentation ensures your depreciation claims are valid and supported.
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Step 3: Calculate Depreciation Using the Correct Method
The ATO allows two methods for claiming depreciation:
- Prime Cost Method (also known as straight-line depreciation): This method spreads the depreciation evenly over the asset’s useful life.
- Diminishing Value Method: This method allows for larger depreciation deductions in the earlier years of an asset’s life.
The Prime Cost Method is generally used for long-lived items, like the building’s structural improvements, while the Diminishing Value Method works better for plant and equipment that wears out faster.
Step 4: Seek Professional Advice
Property depreciation can be tricky, especially with renovations that mix structural improvements and equipment upgrades. Professional advice is essential here. At Refund MyTax Now, we specialize in helping property owners:
- Identify depreciable assets
- Calculate depreciation schedules
- Accurately lodge depreciation claims
Step 5: Include Depreciation on Your Tax Return
After identifying the depreciable assets and getting your depreciation schedule, include the depreciation amounts in your tax return. Enter the depreciation claim as part of your property income deductions. For investors, depreciation deductions can be included under “Other Deductions” for the property.
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