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Depreciating Deductions for Rental Properties
When you purchase a rental property, you are generally treated for tax purposes as having bought a building, plus various separate items of ‘plant’. Items of plant are depreciating assets such as air conditioners, stoves and other items. The purchase price accordingly needs to be allocated between the ‘building’ and various depreciating assets.
We recommend that investors engage a quantity surveyor to determine the split of building and plant items to maximise your deductions.
As part of the 2017 Federal budget, the government imposed limits on deductions for decline in value (depreciation) of second-hand depreciating assets acquired at or after 7.30 pm on 9 May 2017.
The new limits to do not apply to existing residential investment properties as at 7:30pm on 9 May 2017. These rental properties depreciation deductions will remain available to the owner of the rental property.
Below are worked examples of how the imposed limits currently apply to rental properties:
New and second-hand depreciating assets
On 20 August 2018, Donna acquired a two-year old apartment that she offered for residential rental accommodation. Depreciating assets in it included carpet installed by the previous owner in July 2017. Donna installed the following depreciating assets in the apartment before renting it out:
- new curtains that she bought from Curtains Ltd,
- a used television set that she bought from a friend, and
- an old clothes dryer she previously used in her house.
Donna cannot claim deductions for the decline in value (depreciation) of the carpet, television set and clothes dryer as they are second-hand depreciating assets. However, she can claim depreciation deductions for the curtains as they were new when installed.
Established residential rental property purchase
Samantha bought a one year old residential rental property for $500,000 on 1 July 2018 and rents it out. The property contains various depreciating assets that were used by its previous owner. Since Samantha bought the property after 9 May 2017, she cannot claim deductions for the decline in value of any existing depreciating assets in the property.
Buying from a Developer
If you purchase a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property (or its common area) if:
- no one was previously entitled to a deduction for the asset, and:
- either;
- no one resided in the property before you acquired it, or
- the asset was installed for use or used at this property and you acquired the property within six months of it being built or substantially renovated.
To maximise your Residential Property Depreciation Deductions, we recommend you:
- Get a quantity surveyor tax depreciation report
- Acquire new assets
We understand the complexities of depreciation calculations can be daunting but the benefits of negatively geared property can have meaningful cash impacts.
Contact your CIB Adviser for a discussion or review your individual tax needs.
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