Understanding new depreciation legislation on second hand residential property by Tyron Hyde

In May 2017, when the changes were announced in the Federal Budget regarding the changes to depreciation that will apply to second-hand residential properties, not many people understood what exchanged changes appeared and how it affected them.

Property investors who acquire a second-hand residential property after May 10, 2017, that contain “previously used” depreciating assets, will no longer be able to claim depreciation on those assets. Depreciating assets, in this case, refers to things like ovens, dishwashers, blinds, etc.

The Federal Government successfully voted on new legislation to change the way depreciation works, representing the biggest move in the industry. The best way to understand it is to break the changes down into nine simple key points:

  • If you acquire a second-hand residential property from 10 May 2017, which contains ‘previously used’ depreciating assets, you will no longer be able to claim depreciation on those assets. This refers to the plant and equipment portion of a depreciation schedule, including: Ovens, Dishwashers, Lights, Air-conditioners. Televisions, Carpets, Lounge suites, Blinds, Common property plant and equipment items.
  • You will still need a depreciation schedule to calculate these deductions, which typically accounts for 85% of the overall construction cost. The structure includes things like brickwork and concrete so there’s no change to that.
  • If you renovate a house while living in it, then sell the property to an investor, the assets will be deemed to have been previously used and the new owner cannot claim depreciation on the plant and equipment.
  • Acquirers of brand-new property will carry on claiming depreciation in exactly the same way as they have done so to-date – for both plant and equipment and structure. This is great news for the property industry, because a lot of developers rely on depreciation as part of their marketing strategy to attract investors.
  • 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. In other words, you can still buy a second-hand property in a company name and claim depreciation on it. You can buy a second-hand property in a super fund – as long as it’s a large one.
  • The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected, so you can still buy a second-hand office or similar and continue to claim the second-hand carpet, exactly as you could before.
  • If you engage a builder to renovate a property – or you do the work yourself – and it is also being used as an investment property, you will still be able to claim depreciation on it when you have finished the renovations. As above, this is because the assets you install are brand new. But if you bought a property renovated by someone else and they lived in it for six months or a year and then sold it – you can’t claim depreciation on the oven and dishwasher, etc. in the future, because they have now been previously used.
  • If you engage a builder to build a brand-new house, or do the work yourself and it remains an investment property, you will still be able to claim depreciation on both the structure and the plant and equipment items.
  • While 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. So, if you bought a property prior to the budget – 9 May 2017 – nothing has changed. And if you have bought an investment prior to this date, and you don’t have a depreciation schedule, there’s never been a better time to get one! You might not get these allowances again.

You will, however, still be able to claim the building allowance in this scenario if the property was built after 1987.

*source Property Observer

Posted in Latest news, News on 19th September, 2019