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Many variables can effect a tax depreciation claim. Therefore every investment property scenario should be assessed on a case by case basis. The following article outlines two common variables that will effect a tax depreciation claim.
1. Have you ever lived in the property?
For a property to be eligible to claim capital allowance and tax depreciation deductions it must be available for income producing purposes (tenanted or available for tenancy). However, properties available for income producing purposes may also be part private residences, including:
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a holiday letting, where the investor utilises the accommodation for part of the year; and
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a rental property, where the owner resides in one part of the house and another portion is rented (for example: a 3 bedroom house, the investor lives in one room and rent is received from the other 2 rooms).
In some instances a property may have been purchased originally for owner occupation and then become an investment, or has been purchased as an investment and occupied by the owner at some stage. Either way, a depreciation claim can not be made for the period of time that the owner is the sole occupant of the property.
When completing a report for an investor in this situation, BMT & ASSOC will discuss the dates occupied, ensure that depreciation is minimised for these periods and ensure that the maximum claim is obtained for the period the property was available to produce an income.
2. Did you build or purchase an existing property?
The process for calculating both the Division 43 (CapitalWorks Allowance) and Division 40 (Plant & Equipment) varies depending on whether an investor builds or purchases an existing property.
When an investor builds a property, a quantity surveyor may be required to estimate construction costs for the building as complete costs may not be known by the investor. Additionally, the investor will not be able to calculate the element of plant and equipment within the cost to build. Considering plant and equipment items depreciate at a higher rate than the 2.5% capital allowance rate available to new residential properties it is in the best interest of the investor to obtain a professional report that calculates both components of a depreciation claim.
In the situation when an investor purchases an existing property, a quantity surveyor should be employed to determine if the Division 43 allowance is available, and if so, calculate the original construction cost. Whether or not the Division 43 allowance is available, all investment properties are eligible for depreciation claims in respect to plant and equipment items within the property. Therefore a quantity surveyor should be employed to determine the depreciation component on all investment purchases regardless of the age of the property.
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