How can you claim for depreciation on your investment property assets?

Real estate investors may have felt somewhat blindsided following the 2017 Federal Budget announcement, as the Treasurer announced changes to the way deductions could be claimed on plant and equipment assets in residential properties.

But with the proposed changes taking their time to pass through the legislative process, property investors have understandably been in a state of limbo as to just how much their tax concessions would be curtailed in future.

A draft Bill, just released by the Federal Government, has finally shone some light on the direction the government is taking regards depreciation of assets.

So how does it impact you?

  • If you're buying a brand-new property, then you can relax. Off-the plan buyers, or purchasers of newly built property, will still be able to claim depreciation on brand-new household assets, such as white goods, oven and hob, and so forth.
  • However, if you decide to sell on that property you bought brand-new, then there are impacts for the new purchaser. The property will now be classed as ‘second-hand’ and claiming depreciation on existing household assets that form part of a second-hand property purchase will no longer be possible. Investors buying a second-hand property will however be able to claim for structural depreciation, as long as there is a depreciation schedule on that property.
  • If you are renovating your investment property, then claiming depreciation on the renovations is allowed. But, if you’re renovating the property while you’re living in it, and then decide to sell it on, it will be classed as second-hand for the new buyer – and they will not be able to claim for depreciation on your renovations.

As always, there are some exceptions…

  • If you bought a second-hand property before 10 May 2017, you’re exempt from these changes. You'll receive a depreciation schedule on your property, and be in line to receive tax breaks on the assets in that property, as per the pre-Budget legislation.
  • And there’s also good news for commercial investors. Only residential properties will be impacted by the new legislation. Commercial and industrial property investors can still claim depreciation on assets within their property, as per before.
  • Buying a residential property through a corporate tax entity or Unit Trust is not the most common scenario, but it may be worth serious consideration in future. The draft Bill indicates investors will still be able to claim depreciation on assets if they go down this route. Take note however, this exemption does not apply if you’re buying through a self-managed super fund.

Overall, there may be some impacts for residential investors, but it’s certainly not all doom and gloom – particularly for those investing in new-builds, off the plan or commercial properties.

And remember, even though you may not be able to claim annual depreciation on your second-hand plant and equipment assets, there’s light at the end of the tunnel. You will be able to claim them as a loss when it’s time to sell, meaning your capital gains tax is reduced – and that’s something that could help to soften the blow in the longer term.

To find out how these changes could impact your future investment plans, please give me a call on 0418 522 422.