An increasing number of Australian homeowners are becoming property investors. In some scenarios, it is by turning their primary place of residence into an income producing investment property.
There are several reasons why a homeowner may turn their primary place of residence into an investment property. The owner may relocate interstate for work, travel for an extended period of time overseas, or they may simply decide to purchase and occupy another property as it may be more financially beneficial to rent out their home and rent themselves.
Before renting your own home, there a number of factors associated. Investors should contact a specialist quantity surveyor such as BMT Tax Depreciation and request a tax depreciation schedule that will maximise the cash returns for the owner once the property starts generating an income.
Changing tax situation
When an owner decides to turn their primary place of residence into an income producing property, their tax situation is transformed. Expenses in holding the property such as interest costs, rates and management fees will become tax-deductible making owning the property more affordable. The rent also becomes assessable income. Another tax deduction available for the owner while the property is income producing is depreciation. Depreciation deductions can be claimed in two ways once the property begins to earn an income, as a capital works deduction or the structural component of the building and for the plant and equipment assets contained in the property.
The Australian Taxation office allows income producing property owners to claim this depreciation as a deduction when they complete their annual tax assessment with their accountant. A tax depreciation schedule works out the exact number of days that a property was rented in the first financial year of the property being income producing. This gives the property owners’ accountant an exact total deduction available for a partial year claim. A tax depreciation schedule will also include any capital improvements that have been made to a property, even if improvements were completed while the property was a primary place of residence.
Common misconceptions
Often property owners think that it is not worth getting a depreciation schedule completed on an older property. While it is true that newer properties may receive higher deductions due to several contributing factors, such as newer plant and equipment assets contained in the property having a higher starting value, and current construction costs generally being higher, all investment properties will earn deductions for the property owner to claim. When a property is not brand new, the owners will still be able to claim depreciation on the structural component for the remaining time within the forty year period allowed for capital works deductions to be claimed. For example, if an investment property is five years old then the owner has thirty five years left to claim. Property owners should note that the capital works deductions are governed by the dates the construction commenced. If a residential building commenced construction before the 15th of September 1987, the owners are unable to claim any deductions on the structure. Investors who own properties that are built before this date will still be able to make a claim on the fixtures and fittings within the property and include any recent renovations, even if the renovation was carried out by a previous owner.
Capital gains implications
A primary place of residence is exempt from Capital Gains Tax (CGT), however when a home becomes an investment property some CGT may be triggered if the property is eventually sold. There are numerous scenarios which will reduce or create a total CGT exemption. It is important to discuss this with an Accountant as each individual scenario is different depending on the property’s first use, how long someone lived in the property, how long it is income producing and if the owner has purchased another primary place of residence.
Consult with an expert
If you have made your home an investment property or you are thinking of making the change, a qualified quantity surveyor such as BMT Tax Depreciation can provide an indication of the likely depreciation and capital allowance deductions you can expect from your property.