An increasing number of Australian home owners 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 home owner 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 are 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; as a capital works deduction, which refers to 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 BMT 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 owner’s Accountant an exact total deduction available for a partial year claim.
A BMT 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.
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 that 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.
* 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. To learn more visit www.bmtqs.com.au/budget-2017 or read BMT’s comprehensive White Paper document at www.bmtqs.com.au/2017-budget-whitepaper
Source: BMT Tax Depreciation