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Claim depreciation deductions on your own home

Uncover the tax benefits for new world property

Australian homeowners are becoming more creative with the ways they use their residences. A record number of workers are setting up home offices, live-in landlords are renting out rooms to earn extra cash, and short-term rentals like Airbnb have been on the rise. People who use their primary place of residence for these purposes can improve their cash flow by taking advantage of numerous tax benefits, including depreciation.

Tax benefits when working from home

According to a survey conducted by Gartner HR, 88 per cent of organisations have either encouraged or required employees to work from home due to COVID-19. This new world way of working looks like it’s here to stay, with a recent research conducted by Venture Insights also finding that 67 per cent of Australians expect to work from home more after the pandemic ends.

The work-related portion of expenses like electricity and internet can be claimed while working from home. The ATO has introduced a temporary, simplified method of claiming expenses to cater for employees working from home due to COVID-19. This shortcut method is available from 1 March to 30 June 2020 and allows a deduction of 80 cents for each hour worked from home.

Alternatively, if you have equipment or other assets that help you earn income from home, you can claim a deduction for some, or all of the costs associated to the assets. Either the fixed rate or actual cost method is ordinarily used by accountants to calculate deductions for office equipment and other expenses.

Claiming more from a home-based business

Small business owners commonly run their operations from home, especially in the early stages. According to the Australian Small Business and Family Enterprise Ombudsman, small businesses account for 98.45 per cent of all Australian businesses.

A portion of general running expenses like electricity, phone bills, internet, heating and mortgage interest repayments can be claimed. A tax depreciation schedule allows home-based entrepreneurs to claim a business-related portion of depreciation deductions for their home. Depreciation can be claimed on both the structural component of the building (capital works deductions) and for the easily removable fixtures and fittings (plant and equipment depreciation) used for business operations.

The following example demonstrates some of the deductions that could be available. In this case, the business owner has a dedicated home office space used for their primary business operations.

Home office depreciation
Original value First year deductions Cumulative five year deductions
Plant and equipment - Division 40
Laptop $4,750 $4,750 $4,750
Monitors $720 $135 $631
Desk $975 $183 $854
Office chair $680 $128 $596
Sit-stand desk attachment $550 $103 $482
Capital works - Division 43 $24,800 $620 $3,100
Total $5,919 $10,413

The depreciation deductions have been calculated using the diminishing value method.

Claiming depreciation on this income-producing portion produces a tax deduction of $5,919 in the first year alone. This will increase to $10,413 over the cumulative five years. The same plant and equipment assets may also qualify for the instant asset write-off that’s covered later in this Maverick 48 publication. The boost depreciation provides to the business’s cash flow is likely to help it grow.

Maximising income while renting out a room

Tax deductions can also be claimed on a pro-rata basis when a room is rented out in a primary place of residence, either permanently or as short-term accommodation. The pro-rata calculation is based on the percentage of the house that’s used to produce income, and the period of the time it was rented out.

Below is a short-term accommodation scenario of depreciation deductions from the income-producing portion of a home. The owner purchased the home brand new and has converted the second floor into an area including a bedroom, kitchenette and bathroom.

Short-term accommodation property depreciation
First year deductions Cumulative five year deductions
Plant and Equipment $2,706 $8,308
Capital works $3,250 $16,250
Total $5,956 $24,558

The depreciation deductions have been calculated using the diminishing value method.

Claiming depreciation produces a first-year tax deduction of $5,956. This will increase to $24,558 over the cumulative five years. The significant improvement to their cash flow allows the owner to pay down debt or reinvest and grow their portfolio.

Homeowners need to consider the Capital Gains Tax (CGT) implications of using part of their home to produce income. While the main residence exemption applies to their home, CGT must still be considered for the income-producing portion. The apportioned CGT amount may also decrease if the 50 per cent discount is applied.

To ensure all benefits are accurately assessed, property investors should speak with a trusted accountant and a specialist quantity surveyor. To learn more about depreciation, Request a Quote or contact BMT on 1300 728 726.