How depreciation affects capital gains tax (CGT) is a frequently asked question among investors. As an accountant, you know this answer isn’t always straightforward, and many variables can affect how much CGT is payable following a CGT event.
Depreciation reduces a property’s cost base and can mean more CGT is payable. However, it is important to ensure that your investor clients know that despite this, depreciation is still well worth claiming.
If you have a client questioning whether to claim depreciation, here are some facts they need to know.
1. Discounts can apply
Many investors aren’t aware of CGT discounts and exemptions such as the 50 per cent discount, the main residence exemption, the 6-month rule and the 6-year rule.
Being unaware of these discounts and exemptions at the start of their investment journey can result in many property investors opting out of claiming depreciation. Doing so can mean they miss out on thousands, often tens of thousands, in depreciation deductions.
The 50 per cent CGT discount is especially beneficial to investors. Most property sales are more than twelve months after the purchase date. So, most would have the 50 per cent discount available, which further enhances the depreciation claim during ownership.
2. CGT becomes more complicated for second-hand properties
The 2017 depreciation legislation changes mean some investors who own a second-hand rental property can’t claim depreciation on previously-used plant and equipment assets.
A specialist quantity surveyor will include a capital loss schedule of ineligible plant and equipment assets. CGT Event K7 can be used to establish this capital loss in the year, even if the property wasn’t sold. Depending on the individuals scenario, CGT Event K7 can influence payable CGT, or have a nil effect.
3. We aren’t fortune-tellers
None of us can predict the future, even with the most robust property investment strategy.
We know that CGT is usually only payable on the capital gain made from the sale of an investment. Depending on the market and other economic factors, it’s possible that an investor could end up selling their property at an overall capital loss.
While this isn’t ideal, CGT doesn’t apply in these situations. This means the investor could’ve claimed maximum depreciation deductions without paying CGT, but they missed out because they chose not to.
An investor’s personal circumstances can change unexpectedly, too. If the property becomes the owner’s physical home prior to the sale, the main residence exemption, and other exemptions, could apply. They therefore could have missed out on claiming depreciation when the property was an investment.
The key takeaway here is that investors shouldn’t decide whether they should claim depreciation on their fortune-telling knowhow. This especially applies to investment properties as they are usually a longer-term commitment.
4. A dollar today is worth more than one tomorrow
Most of us wouldn’t decline a pay rise because it requires us to pay more tax. The same could be said for claiming depreciation and CGT.
The cash flow depreciation provides throughout an investor’s ownership period far outweighs the difference it can make to CGT. This financial boost can help them on their investing journey and provides the opportunity to reinvest the cash into other sources of capital.
Partner with the specialist and help educate your clients
We all have a role to play when educating investors about the benefits of claiming depreciation. BMT Tax Depreciation is the specialist in the industry and ensures that every investor claims the most depreciation possible.
The BMT guarantee means that if BMT can’t find double their fee in the first full financial year claim, there will be no charge for their services. This ensures that every BMT Tax Depreciation Schedule is worthwhile.
Learn more about BMT and the free resources offered to accountants on the BMT Tax Depreciation accountants page.