Yes, you can generally claim depreciation on an old house, provided it is an income-producing property. While newer properties typically offer higher depreciation deductions, investment properties, both new and old, can attract valuable tax benefits for their owners.
Understanding Property Depreciation
Depreciation is the decline in value of an asset over time due to wear and tear, age, or obsolescence. For investment properties, depreciation is a non-cash deduction that allows property owners to offset a portion of their property's cost against their taxable income, even if no cash changes hands. It's a way to account for the gradual deterioration of the building structure and its fixtures and fittings.
Eligibility for Older Investment Properties
To claim depreciation on an old house, the primary condition is that the property must be used to produce income, such as a rental property. You cannot claim depreciation on your primary residence.
Even with an older property, various components can still be eligible for depreciation. Investors often inquire about the depreciation differences between older properties and newer ones. While newer properties often yield higher overall depreciation benefits due to recent construction and new internal assets, older homes can still offer significant claims.
What Can Be Depreciated in an Old House?
Depreciation for an old house typically falls into two main categories:
1. Capital Works (Building Structure)
This refers to the depreciation of the building's structural elements, including:
- The building's shell (walls, roof, foundations)
- Integral components like driveways, fences, retaining walls
- Structural improvements and additions
Important Consideration for Older Houses:
The ability to claim depreciation on the original construction cost of the building structure (Division 43 in Australian tax law, or similar capital cost recovery in other jurisdictions) can be limited for very old properties, especially residential ones, depending on specific tax laws and acquisition dates.
However, any renovations, extensions, or structural improvements made to an old house after a specific cutoff date (and while it's owned by you as an income-producing asset) are generally eligible for capital works depreciation. This is a significant opportunity for owners who buy an old house and then renovate it for rental purposes.
2. Plant & Equipment (Fixtures and Fittings)
This category includes items that are easily removable and are typically found within the property. These assets generally have a shorter effective life than the building structure and are subject to higher rates of depreciation. Regardless of the age of the house, if these items are present and used for income production, they can often be depreciated.
Examples include:
- Air conditioning units
- Carpets, blinds, and curtains
- Hot water systems
- Ovens, cooktops, and rangehoods
- Dishwashers
- Smoke detectors
- Light fittings
- Security systems
Even if an old house has old fixtures, any new additions or replacements (e.g., installing a new hot water system, replacing old carpets, upgrading kitchen appliances) are fully depreciable assets from the time they are installed.
Old vs. New: The Depreciation Advantage
| Feature | Older Investment Property | Newer Investment Property |
|---|---|---|
| Capital Works | Original structure may have limited or no depreciation if built before specific dates. Renovations/additions are depreciable. | Full depreciation on the entire building structure (typically 40 years). |
| Plant & Equipment | Depreciation possible on existing and new fixtures/fittings. | Full depreciation on all new fixtures/fittings. |
| Overall Deductions | Generally lower, but still significant, especially with renovations. | Generally higher due to new building and new assets. |
| Primary Benefit | Capitalize on improvements and existing valuable assets. | Maximize deductions from overall new construction. |
As highlighted, owners of newer properties will typically receive higher depreciation deductions because both the building structure and all internal fixtures and fittings are new and qualify for the full depreciation period. However, as the table illustrates, older properties still offer valuable depreciation opportunities, particularly through renovations and existing or new plant and equipment.
Maximizing Depreciation Claims on an Old House
To ensure you're claiming all eligible deductions on your old house, consider these steps:
- Engage a Quantity Surveyor: A specialist quantity surveyor can prepare a comprehensive depreciation schedule. This report details all depreciable items within your property and their effective lives, maximizing your claims over the property's lifespan. They can retrospectively analyze renovation costs and the value of existing plant and equipment.
- Identify Renovations: Even if you didn't conduct the renovations yourself, previous owners might have. A quantity surveyor can often estimate the costs of past renovations to include them in your depreciation schedule, provided they meet eligibility criteria.
- Keep Records: Maintain meticulous records of all expenses related to property improvements, renovations, and new appliance purchases.
Claiming depreciation helps to reduce your taxable income, potentially leading to significant tax savings and improved cash flow for your investment.
Example Scenario: Renovated Old House
Imagine you purchase an old house built in 1960. While the original building structure might not be depreciable, you decide to undertake a major renovation, including:
- Installing a new kitchen (new cabinetry, oven, dishwasher)
- Upgrading two bathrooms (new fixtures, tiling)
- Replacing all carpets and blinds
- Adding a new air conditioning system
- Building a new deck
All the costs associated with these new items and structural improvements would be fully depreciable under capital works and plant & equipment categories, allowing you to claim significant deductions, even on a very old property.
For more detailed information on property depreciation, it's advisable to consult official tax guidance for your jurisdiction, such as IRS guidance on rental property depreciation or the ATO guide to rental property depreciation.
