Discover how your tax situation is transformed
A recent analysis of schedules prepared by BMT Tax Depreciation highlighted that 22% of schedules were for primary places of residence (homes) which the owners turned into rental properties.
This demonstrates a popular trend occurring in the residential market, in which a significant number of home owners are recognising the additional value of renting out their home rather than selling.
There are many reasons for this trend of home owners becoming investors. Some home owners may need to temporarily relocate, with a plan of returning to their home. There could also be external economic factors or events which create a temporary peak in rental demand, causing homeowners to take advantage of the higher rental yield.
The most common reason is usually due to the prospect of long-term capital growth along with the opportunity to use equity to finance the next home and avoid selling costs.
Across some of our major cities, the majority of people who adopted this strategy would have achieved substantial capital growth in recent years.
This particularly relates to those acquiring their next primary place of residence, having carried more than one property through a housing boom. Of course this can work in reverse should there be a correction in housing prices.
No matter what reason home owners becoming investors have, it’s important they’re aware how this will transform their tax situation.
The Australian Taxation Office requires owners of investment properties to report any income they earn. They also allow owners of income producing properties to claim the expenses associated with the property.
Some of the deductible expenses for an income producing property include interest on a loan, council rates, property management fees and insurance premiums.
By renting out their home, owners will also become eligible to claim depreciation deductions for the structural components of the building as well as the *plant and equipment assets contained in the property, subject to qualifying dates.
* Under new legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15th November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9th May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand-new property will still be able to claim depreciation as they were previously.
Regardless of whether a property is income producing or not, the structure and fixtures experience wear and tear over time and depreciate. However, it is only when the property starts to produce income that the owner can start to claim this wear and tear as a deductible loss.
A depreciation schedule will commence from when the property was initially purchased. If a depreciation schedule is provided by a specialist, it should show a partial financial year calculation for the period it was income producing.
A specialist Quantity Surveyor will also structure a depreciation schedule to maximise deductions during the time that a property is income producing and minimise deductions when the property was a primary place of residence. An example of this is establishing a low-value pool for relevant assets at the right time.
Low-value pooling is a method where low-cost assets with an opening value of less than $1,000 and low-value assets with a written down depreciable value of less than $1,000, can be depreciated at an accelerated rate. If a property was formerly a home, it is best to hold off any low-value pooling until the property starts to produce income.
If you are thinking about renting out your home, BMT can provide you with a free estimate of the likely depreciation deductions that will become available.
You should always discuss renting out a home with your Accountant; including the potential tax implications of Capital Gains Tax (CGT) should you plan to sell down the track.
Are you a home owner looking to become an investor? Have a read of our FAQs for Property Investors to get you started!
Bradley Beer (B. Con. Mgt, AAIQS, MRICS, AVAA) is the Chief Executive Officer of BMT Tax Depreciation. Bradley joined BMT in 1998 and as such he has substantial knowledge about property investment supported by expertise in property depreciation and the construction industry. Bradley is a regular keynote speaker and presenter covering depreciation services on television, radio, at conferences and exhibitions Australia-wide. Please contact 1300 728 726 or visit www.bmtqs.com.au.