Just like a car declines in value, so does an investment property. If the property is being used to generate an investment income, the Australian Taxation Office (ATO) allows the property owner to claim back the decline in building value by way of a tax deduction.
The amount of the deduction varies depending upon the date of the original building construction but is either 2.5% or 4% of the Capital Works Component of the building cost. In addition to this flat rate the ATO recognises that a number of building components (plant and equipment) have a shorter life than say bricks and mortar. Appliances, carpet, air-conditioning, blinds, smoke detectors are just a number of the ‘wear and tear’ items that have a shorter effective life than the main building structure and as such are granted an accelerated rate of depreciation.
Additionally areas of ‘common property’ such as corridors and stairways in an apartment block may be proportionally claimed by the owner as part of their depreciation claim.
Over-all, by utilising the benefits of property depreciation, the investor can turn what may otherwise be a negative cash flow into a positive cash flow.