The property market has finally received some clarity in relation to the Government’s plan to reduce depreciation deductions for residential properties. It’s good news too if you ask me.
On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.
It’s complicated, to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the draft Legislation;
- If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
- Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.
- The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
- The building allowance or claims on the structure of the building has not changed at all. You will still need a Depreciation Schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
- The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note Self-Managed Super Funds do not apply here) or a large unit trust.
This is interesting and I suspect a lot more people will start buying properties in company tax structures.
- If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
- If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
- If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
- Perhaps the most interesting point: Whilst investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property.
How? Well, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.
Here is an example of how this will work:
Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.
As they were previously used, Peter can’t claim depreciation on those items.
Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.
Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.
SUMMARY OF THE PROPOSED CHANGES
In my view, the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to New and Second-hand property.
You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.
It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:
- Claim the building allowance (where applicable) and
- Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.
The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.
I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.
But it wasn’t a bad ‘first run’ by the Government!
P.S. If you purchased an investment property prior to The Budget, you are not affected and you should get a depreciation schedule quote now.
8 Comments. Leave new
Gday Tyron, great article.
As a Buyer’s Agent I need to keep up with this for my clients to make informed choices. 2 questions:
1 – If an investor buys a 2nd hand property and renovates it for rental, are they able to claim their renovation costs I think they can because they are the ones with receipts for expenses (and can they scrap the existing assets – I think perhaps they cannot?)
2 – If someone buys and moves into a property to access the new NSW Stamp duty exemption, lives in for 6-12 months or so and then moves out converting it to a rental, and renovates during their “live in” time…are the assets previously used or can they be claimed as the investor did actually spend the money themselves but the property purpose was different at that time.
THANKS!
Hi Matt,
Thanks for the feedback.
1. Yes, if you renovate you can certainly claim depreciation on the renovations, building allowance and plant and equipment. Provided you weren’t living in the property during the renovation and used the asset(s) yourself. Regarding scrapping, would need more info, like when they bought the property etc.
2. Yes the assets are previously used – therefore they cannot claim. The Draft bill is pretty clear on this point…but it’s a good question. It will get a little bit grey if you ask me…as some items like ovens dishwasher etc could be installed on the last day you are living there and not used.
Hope that helps
Regards
Tyron
What if the previous investor/owner, who rented the property, didn’t claim depreciation? Is it then claimable? What if the property is only 2 years old and still has 8 years of life left?
Hi Jillian, No it is not if the legislation goes through. They are pretty clear that the asset has to not have been “Previously used”.
So by way of example, even if a First Home Buyer buys a brand new unit and then moves out they can’t claim it.
But remember you will still need the asset values – so you reduce your CGT when you sell it.
Regards
Tyron
How to claim depreciation on used assets
Example : agree with vendor to pay $600,000 for a property
Get Agent to draw up a contact for $540,000 under special conditions exclude carpets, stove, hot water service etc (all depreciating assets) Then have a seperate agreement with he vendor to purchase All items that were excluded for $60,000 as the agent made the introduction he gets his commission on the $60,000 Depn assets contract, You can then claim depreciation as you have actually paid for these assets.
State Govt’s get less stamp duty as house sold for $540,000 not $600,000 Capital gain for vendor less, as sale price lowered (sale of land acts) New purchaser can claim Depreciation as they have purchased these assets. Smart Real estate agents should set up a new company Say (Ray White interiors) this way they can buy assets from vendor and on sell the assets to the purchaser thus making sure they get their commission.
Well then the vendor might have asset balancing incremental adjustment (revenue account) instead of capital gains (50%), if $60K did higher then the asset written down value. Even for developer selling brand new property, all these “brand new” assets would have at least depreciated in notional way since first installed.
A very expensive agents commission for a purchase of $600,000.
There is a simpler way and you are on the right lines having two contracts. The second contract for the depreciating assets though is for a company buyer of those assets.. Companies are not subject to the depreciation prohibition and it can then rent the assets to the property owner tax effectively. The problem of course is with the cost of doing that and as I have detailed in my Linked In article, those costs are simply not warranted given the insignificant impact of the changes… Unless of course, you already have a corporate trustee… then there is no incremental cost to that arrangement.
The reality of this initiative though, is that it makes very little difference to investor returns on investment. I have done the numbers and not only will this have no affect on housing affordability it will not in any material way affect property investor returns…
A note for Washington Brown though, add a paragraph in your schedule to value the purchase price component of the depreciating assets.. That CGT benefit at the end compensates investors for the lost depreciation during the holding period and that value will be vital to maximise that benefit..
Hi Tyron, Sharlene Cohen, from Surety Property. thanks for the update and that’s a bit of a shy of relief for everyone. Lets hope it gets passed. Kind Regards, Sharlene