If you own an investment property, you need to know the new rules around depreciation
For those of you who own an investment property, you’ll be familiar with me talking about the need for a depreciation schedule to take advantage of depreciation allowances and increase your tax deductions come tax time.
Why? Since the mid-80s, investors who purchased an established residential investment property could claim for depreciation of assets, even if those assets had already been depreciated by the previous owner. Assets could be assigned new residual values and new effective lives each time a property changed hands, and be depreciated by the new investor accordingly.
However, it is no longer a ‘no brainer’ to pay for a depreciation schedule when you a purchase a second-hand investment property. The federal parliament recently approved several changes to depreciation allowances including removing the ability for property investors to claim deprecation for plant and equipment – these are items that are easily removable (i.e. air conditioning, carpet or hot water) in second hand residential properties purchased after May 9 2017.
The good news is not all depreciation allowances will go. Capital deductions are still available as are deductions for fixed items like doors and basins etc. Capital deductions include the value of a building which can be written down at 2.5 per cent per annum over a 40-year life.
There are still plenty of scenarios that would see a depreciation schedule benefit investors
The following investment properties will still benefit from a depreciation schedule:
- brand new properties
- properties with capital improvements or additions during the past 40 years that remain depreciable
- properties renovated by the new owners that include new replacement plant and equipment.
There are two important notes to this however:
- investors purchasing a property over 40 years of age with no capital improvements will not benefit from a depreciation schedule nor will they be able to claim for the plant and equipment assets
- the change in allowances will only apply to people who bought their investment properties after May 9 2017.