Tax deductions and your real estate investment

capital-gains-tax3By Robert MooreMSI Taylor Business Services, Accountants, Brisbane.

Income tax deductions for the decline in value (depreciation) of previously used plant and equipment in rental premises used for residential accommodation are no longer allowed.

From July 1, 2017, the Government has limited plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

This means property investors can only claim depreciation on dishwashers, fans, and other fixtures they’ve paid for themselves.

These changes apply from 1 July 2017 to:

  • previously used plant and equipment acquired at or after 7.30 pm on 9 May 2017 unless it was acquired under a contract entered into before this time
  • plant and equipment acquired before 1 July 2017 but not used to earn income in either the current or previous year.

The new depreciation changes won’t have any effect on property that are already owned before the budget night. The changes only affect owners who have exchanged contracts on an investment property after 7:30 PM on 9 May 2017.

Investors who have purchased new plant and equipment will continue to be able to claim a deduction over the effective life of the asset.

So investors who are looking to purchase rental properties need to factor in these changes to their calculations when deciding on an investment. The tax deduction for depreciation can be sizeable and increases negative gearing for an investor. The other beauty of depreciation is that it is a non cash flow outlay. Unlike rates which need to be paid from cash as an ongoing expense, depreciation deductions flow from the initial capital outlay.

So unless you purchase a new rental property, you will be precluded from adopting depreciation from assets purchased by the previous owner.

So before you make a decision on the purchase one of a number of options, consult your adviser first.

Contact the author directly by email or by telephone.

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