Wear and tear on an investment property’s chattels and fittings is rarely recognised as an expense by property investors. After all, it happens slowly and doesn’t cost anything at the time—easy to let it slip by.
But that’s why so many investors don’t make the most of depreciation when they file their tax returns. To make sure you don’t pay a dollar more tax than you should, we’ve run through the basics of depreciation for property investors.
What is depreciation?
Over time, assets experience wear and tear and their value slowly decrease. Depreciation accounts for this loss by assigning a dollar value to the asset and estimating the amount lost per year.
This yearly amount can be claimed as an expense on your tax return and used to reduce your taxable income—less taxable income, less tax needed to be paid. That means more cash left in your back pocket.
You may be able to depreciate many of the items in your property.
What items can you claim?
Generally speaking, you should be able to depreciate most of the items in your rental property that aren’t a part of the building – these are known as chattels.
Examples of chattels that you can claim depreciation on include:
- Certain types of air conditioners and heat pumps.
- Air ventilation systems.
- Small appliances.
- Curtains and blinds.
- Freezers and fridges.
- Light shades.
- Loose furniture.
- Satellite dishes.
- Washing machines.
- Waste disposal units.
The IRD assigns each of these items a useable life from 3 – 15 years along with its dollar value, allowing you to calculate depreciation on each.
How do I claim?
You can use one of two methods to calculate depreciation:
- Diminishing value: depreciation is calculated as a percentage of the item’s tax value, which means your depreciation reduces each year.
- Straight line: your asset depreciates every year by the same amount – a percentage of its original cost price/value.
To use these methods, you’ll obviously need to know the value of your chattels. This is easy if you bought them as you can simply use the price on the receipt. If you didn’t (or can’t), you’ll need to research the market value of the asset and use that. Another important thing to note is that in some cases you may be able to instantly claim the entire value of newly purchased assets under $500 as depreciation.
Keep in mind the IRD does audit property investors so you must be confident that any values are correct before you use them to avoid any issues—and keep records of receipts.
Getting professional help with depreciation
There could be dozens of items throughout your investment property that can be depreciated, saving you money at tax time.
If you’ve never claimed depreciation or you’re unsure about the details, it’s always a good idea to get professional help from a specialist property accountant. Get in touch with the experienced team at Property Tax Returns today to make sure you don’t pay a dollar more in tax than you should.