Investment Property Depreciation Schedule for New Builds

While it’s true that the sale value of a property tends to appreciate over time, this appreciation of value occurs on the land component and not on the house/building.

In reality, all property builds, whether for investment or a family home, will depreciate due to natural wear and tear. Understanding this is a key part of property investment that ties into maximising depreciation claims from annual tax payments. 

This is especially applicable to new investment builds, which offer the maximum number of tax deduction claims - up to 40 years for capital works deduction, plus deductions on the fittings and furnishings of the property.

Eligible Property Depreciation Claims for New Investment Builds

In Australia, investors can make depreciation claims on the structure of a new build for up to 40 years from the date of build completion. Depreciation claims on the property itself are referred to as Capital Works (Division 43) by the Australian Taxation Office (ATO).

New builds are eligible for another type of depreciation claim - Plant and Equipment (Division 40). These claims are made on the value of fittings and fixtures that came with the new build, ranging from air conditioning units to carpet flooring. Plant and Equipment items do not have a fixed number of years for claims - this is dependent on each item's typical lifespan. The ATO’s website specifies which assets are eligible for Plant and Equipment depreciation claims, and for how many years.

How Is Property Depreciation Calculated?

Capital Works deductions are calculated at a flat rate of 2.5% per year. This 2.5% is based on the original construction cost of the build (excluding the cost of the land component) instead of the price it was purchased for.

The ATO outlines two ways to calculate Plant and Equipment depreciation for a new build: 

• Prime cost method - This method involves claiming the same fixed deduction each year.
• Diminishing values method - This method starts with higher deduction claims in the early years, and the claims reduce over time. The diminishing values method is used to claim as much depreciation as possible in the early years.

Once a method is selected for a specific asset, it cannot be changed, so it's worth consulting a financial advisor before deciding which approach best suits your financial position. 

How to Create a Property Depreciation Schedule for a New Investment Build

A property depreciation schedule is a formal document that outlines every depreciation deduction available to you as an investment property owner.

The schedule details the depreciation allowances you are entitled to claim on each of the assets within a property throughout their effective life, breaking down how much you are able to claim each year. This provides you with all the necessary information regarding a particular asset's cost, effective life, depreciation method and what annual deductions you are entitled to claim.

Here is an example property depreciation schedule of a new investment build with a construction cost of $350,000, coupled with carpet and air conditioning assets worth $8,000 and $4,000, respectively. Both carpet and air conditioning assets are claimed using the diminishing values method over an effective life of 10 years. 

For investors of new builds, the best way to establish an accurate depreciation schedule is to work directly with an investment property builder. A builder with experience in investment properties will have precise records of construction costs, fixtures, and fittings from the outset - all of which are required to produce a complete and compliant schedule.

Builder Direct is an investment builder offering house and land packages in Cairns and Mackay. We are a local North Queensland builder with extensive experience in delivering quality investment homes built for consistent rental performance and long-term growth.