As a result of changes to property depreciation legislation in November 2017, there’s been much confusion by property investors as to what they could claim on their second-hand properties.
There’s a misconception that lucrative depreciation deductions can no longer be claimed for second-hand properties.
In fact, investors can still claim around 85 to 90 per cent of the deductions that they could prior to the budget changes taking effect.
So what exactly do the changes mean for second-hand properties?
On Wednesday 15th November 2017, Parliament passed the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 in what was the biggest change to property depreciation legislation in over 15 years.
The legislation stated that owners of second-hand residential properties could no longer claim depreciation for existing plant and equipment assets if contracts were exchanged after the 9th of May 2017 at 7:30pm.
Plant and equipment, or division 40 assets, are those not considered part of the property’s structure and can be easily removed. This includes anything from the oven, rangehood, dishwasher and smoke alarms down to carpets, garbage bins and shower curtains.
If you exchanged contracts on a second-hand property after the 9th of May 2017 at 7:30pm and purchased new plant and equipment assets, you can claim depreciation. The legislation only governs existing assets that were in the property at the time of purchase.
Investors who purchased a second-hand property before the cut-off date are exempt from the legislation changes and can continue claiming as before.
The legislation however, made no changes to the more profitable depreciation category of capital works, or division 43.
Capital works deductions make up 85 to 90 per cent of depreciation claims and relate to the building structure and permanent fixtures. This includes things such as the foundations, walls and floors as well as windows, toilets and sinks.
The deduction is available on residential investment properties that commenced construction after the 15th of September 1987. It can be claimed at a rate of 2.5 per cent for up to forty years.
If you purchased a property that was constructed prior to 1987, it’s advisable to still contact us as we can research if any renovations have taken place on the property. You may be eligible to claim these renovations as a deduction.
Second-hand property owners are eligible to claim depreciation on capital works carried out by themselves and by the previous owner.
In the FY 2018-19, we found our clients an average of almost $9,000 in first-year tax deductions for all residential properties. For clients with properties directly affected by the legislation changes, we still found an average of $5,641 in deductions per year.
It’s more important than ever to work with a specialist quantity surveyor to ensure that all deductions are identified and claimed correctly under the new legislation.