Deciding to sell your residential investment property is an important decision. Whatever the reason for selling may be, you must continue to maximise your property’s cash flow while it’s still yours.
Claiming depreciation on your rental property when selling is possible, but it can be tricky.
First, can a property still be used as an investment while it’s for sale?
Yes. How this works depends on the current lease agreement.
If your tenant is on a fixed arrangement you must continue to honour this unless a mutual agreement has been reached for the tenant to exit early. This applies to every State and Territory and a new owner must also honour a fixed-term agreement.
When the lease is a periodic agreement it works differently depending on which State or Territory the property is in. For example, in Queensland you can give your tenants four weeks’ notice once a contract of sale has been signed, while in Tasmania you can give your tenants 42 days’ written notice.
Can you still claim depreciation on your rental property when selling?
The property is still costing you money, so it’s important that you continue to do what you can to minimise costs and boost your cash flow.
The good news is that if your property is genuinely available for rent, even if it isn’t physically tenanted, you can claim depreciation and all other expenses.
The Australian Taxation Office (ATO) has several requirements for a property to be classed as genuinely available for rent.
One requirement is when ‘having regard to all circumstances, tenants are reasonably likely to rent it. There’s no doubting that it’s harder to attract quality tenants while a property is for sale. However, you can introduce some strategies to make it easier like a discounted rental rate or including some utilities like water usage, electricity or internet.
Can you claim partial year depreciation deductions while the property is for sale?
You can’t predict how long your property will be on the market before it sells. If it’s still genuinely available for rent during this time, don’t forget about partial year deductions.
For example, if you put the property up for sale May 2020 and it sold in September 2020, you can claim a full year depreciation deduction for the 2019-20 financial year and a partial year depreciation deduction for the 2020-21 financial year. Partial year deductions boost cash flow by thousands so it’s important to claim them at tax time.
What happens after the sale?
Once the property is sold and settlement is complete, you can no longer claim depreciation on it.
Remaining capital works entitlements pass onto the next owner if they choose to continue to use the property as an investment. They can’t claim depreciation on existing plant and equipment assets in residential properties due to legislation introduced in 2017.
Another factor to consider after sale is capital gains tax (CGT). This is a tax charged on the profit, or capital gain, made from the sale of an income-producing asset. Several factors affect how much CGT is available, discounts and exemptions can also apply.
CGT is very complex, and the key step is to discuss the topic with your accountant both before and after the sale. They are experts in this area and will provide further guidance.
BMT is here to help throughout your investment property journey
BMT Tax Depreciation can help you make the most from your investment property. You can take advantage of depreciation deductions at any stage in your investment property journey, ensuring your cash flow is maximised to its full potential.
To learn more about how you can benefit from claiming depreciation, call the BMT Team on 1300 728 726 or Request a Quote.