Changes to Depreciation rules to cost landlords
Thousands of property investors will lose on average more than $4,000 per year in depreciation related deductions, after the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed through parliament.
Owners of second hand residential properties purchased after 7:30pm on the 9th of May 2017 will be ineligible to claim depreciation for plant and equipment assets, such as air conditioning units, solar panels or carpet. Previously existing legislation will be grandfathered, meaning investors who purchased investment properties prior to May 9th can continue to claim depreciation deductions as per usual.
Investors who purchase new residential properties, and commercial owners or tenants who use their property for the purposes of carrying on a business, are not affected by these legislative changes.
BMT Tax Depreciation Chief Executive Officer Bradley Beer, says these changes could result in significant losses for investors.
“According to our analysis over the first five years of ownership the new law will result in an average loss of around $4,236 in depreciation deductions each year for those impacted.”
“The new rules do not affect capital works deductions for the structural component of a property or any fixed items that can be claimed such as doors, basins or retaining walls. These deductions typically make up between 85 to 90 percent of a total claimable amount,” said Mr Beer.
“On average, the owner of a three-year-old house purchased for $600,000 (after 7:30pm on the 9th of May 2017) could expect to claim around $6,126 in capital works deductions in the first full financial year alone.”
What does this bill mean for Property Investors?
If you bought your property before 7.30pm on May 9, 2017 you can continue to claim depreciation. This is good news. It’s also good news for investors who bought a brand new residential property or a new or second-hand commercial property. In both instances, you can continue to claim depreciation and will be unaffected by the changes.
The bad news exists for those of you who bought a residential property after 7.30pm on May 9, 2017, as you will no longer be able to claim depreciation on plant and equipment that you didn’t buy. Of course, if you buy plant and equipment for your second-hand property, you can still claim depreciation for assets you buy and directly incur an expense on.
The only silver lining is that while in the past, property investors received the upfront cash flow of plant and equipment depreciation deductions, they had to add back the depreciation claimed when they sold the property. This means that any future capital gains made should be lower as a result of these add-backs no longer applying.
Despite these changes, property investment is still a favoured investment by many Australians. However, it is more important than ever before to ensure you have both the cash flow to afford the property in the long term and are aware of what you are and are not able to claim.