The short answer is yes! In many cases, investors who purchase second-hand residential properties after May 2017 can still claim some substantial deductions for depreciation, despite many investors and their advisers believing otherwise.
First and foremost, investors who have purchased their rental property in a company structure are unaffected by the legislation.
However, for the majority who are individual taxpayers, here’s what you need to know to claim:
- Division 43 (Capital Works) is still claimable on all established or second-hand residential properties, regardless of when they were purchased – this includes original works (if they qualify) as well as improvements and additions completed over time;
- Division 40 (Plant and Equipment Assets) acquired through the purchase may not be depreciable annually but are now deductible from profit at sale and help to reduce CGT;
- Division 40 (Plant and Equipment Assets) that are replaced brand-new by the investors after purchase are eligible for depreciation claims.
Finally, see our case study below to find out how our clients, who purchased a 13-year-old property (with no improvements) after May 2017, were still able to claim up to $175,000 in depreciation deductions over their investment.
Division 43 (Capital Works) is still claimable on all established or second-hand properties, regardless of when they were purchased
Regardless of when investors have purchased their established residential investment property, they are still able to claim depreciation deductions for Division 43, also known as the structure of the property, or the building works. Depreciation is calculated from the full construction cost of the building structure which is upwards of hundreds of thousands of dollars, and has an effective life of 40 years.
A quantity surveyor will be assessing both original works as well as researching for any capital improvements that have been completed over time.
Original works
As long as the property was built after 16th of September 1987 it will still generate depreciation deductions for investors. Even a $220,000 build that is now 25 years old, still generates $5,000 in depreciation deductions per annum, and will do for another 15 years, totalling $75,000 worth of deductions over the 15 years.
If any of that structure is demolished or removed during a renovation then the residual value can be claimed immediately as “scrapping” or disposal of asset.
Improvements or additions that have been completed over time
If the property has undergone structural improvements over time, those full costs of those works are also depreciable and will have a different effective life from the original structure. Where the costs of previous works aren’t known, or are incomplete a quantity surveyor is qualified to estimate those costs for the investor.
As an example, if a previous owner spent $140,000 dollars on structural additions 5 years before they sold, the new investor owners are able to claim $3,750 per annum for the depreciation of those additions for the next 35 years, totalling $131,250 in tax deductions over that time. Again, if those works are demolished in a subsequent renovation, the full residual amount is immediately claimable as “scrapping”.
Division 40 (Plant and Equipment Assets) are now deductible from the profit at sale and help to reduce CGT payable
Many investors and their advisers are aware that they can no longer claim for the annual depreciation of second hand assets acquired through the purchase of an established residential property.
However, what many investors don’t realise is that the value of the depreciation of those assets over time becomes a tax deduction when the investor sells. These non-cash expenses can be deducted from the profit at sale thereby reducing the capital gains tax payable.
Division 40 (Plant and Equipment Assets) that are replaced after purchase are eligible for depreciation claims
Any new assets installed by the investor owner will be eligible for annual deductions. Examples include installation of air-conditioning, replacing hot water systems, replacement of kitchen appliances, new carpet, blinds etc.
Many of these items are often installed new by investors when preparing an established, newly purchased property for lease.
Thousands of investors are still claiming excellent depreciation deductions on second-hand residential properties purchased after May 2017
Despite the myth that a depreciation schedule is no longer worthwhile for second-hand residential properties, we are producing many schedules for these types of properties every day and seeing fantastic results for clients.
Whilst deductions in the earlier years are not as high as they were previously (once attributable to the plant and equipment assets), the benefits are still significant, and for many investors, depreciation is still one the largest deductions they claim against their taxable income.
Case Study
We recently produced a Capital Claims Tax Depreciation schedule for our clients, Kristin and Luke.
Key property details
Property: Two-bedroom unit
Property Age: 13 years old
Purchased: March 2021 (falls under current legislation)
Condition of property: Original, no improvements or additions
After being told by other quantity surveyors that a depreciation schedule would not be worthwhile, our clients Kristin and Luke discovered they were entitled to claim over $6,500 in structural depreciation (Division 43) deductions per year for the next 27 years.
That totals over $175,000 in depreciation deductions over the remaining life of the property!
The value of Kristin and Luke’s accumulated depreciation deductions for their plant and equipment assets ie. carpet, blinds, and stove (Division 40) is still of benefit as a future CGT offset amount. Depending on if or when they sell, their CGT offset amount could be up to $30,138.
Furthermore, when Kristin and Luke complete property updates such as installing a new air conditioner or renovating the kitchen, their depreciation schedule can be updated accordingly (and free of charge with Capital Claims Tax Depreciation) and they will make the most of those deductions as well!
Below are other real examples of our clients second-hand residential properties. To see what we achieved and how much our property investors saved click on the individual case study. Each outlines their salary, rental income, tax deductible expenses, and what their results look like without or with claiming the tax depreciation deduction:
1. Four-bedroom house built in 1973 purchased for $495,00
2. Existing 2 bedroom unit in large complex built in 2014 purchased for $605,000
Key tip – use a specialist quantity surveyor to prepare your depreciation schedule
If you are an investor with a second-hand investment property the key to ensuring you are maximising your depreciation entitlements is to engage a specialist quantity surveyor to prepare your depreciation schedule.
This is critical as building depreciation is calculated from the construction cost, and not the purchase price or valuation. Only certain professions are qualified to estimate those costs historically, assign a value to the assets and forecast the deductions.
Accountants, real estate agents and valuers are not recognised by the ATO as qualified to do this work. Not only are you likely to be missing out on thousands of dollars worth of deductions, but your schedule may not be deemed compliant by the ATO in the event of an audit.
Not all quantity surveyors are depreciation specialists and know the legislation in great detail the way we do at Capital Claims Tax Depreciation.
This is our niche, and all we do. We will always advise if for any reason we don’t believe a depreciation schedule will be worthwhile for you. We are always prepared to give you a reliable estimate of deductions before you proceed with any engagement, and will never invoice for a schedule that does not provide solid value.
If you would like to discuss your investment property, and the value of a depreciation schedule for your circumstances, give our friendly team a call today on 1300 922 220. You can also request a free, no obligation estimate of deductions online here.
Related articles –
I purchased a second-hand property, what can I claim?
What tax deductions can I claim on my rental property?
Can I still claim depreciation on my investment property since the new legislation passed?
