Property investment – Partial year deductions

If you haven’t owned your investment property for a full financial year, you don’t need to wait until next financial year to order a tax depreciation schedule. Even if the property has only been owned for a short time, depreciation deductions will still be available.

What is property depreciation?

Property depreciation is the natural wear and tear of a property and its assets over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this depreciation as a tax deduction.

There are two types of depreciation claimable. Capital works deduction (Division 43) is claimable on the structure itself and items permanently fixed to the property. Plant and equipment depreciation (Division 40) is claimable on assets which are easily removable from the property or mechanical in nature. 

Partial year depreciation deductions

Property investors can claim pro-rata depreciation deductions for the portion of the year that their property is either rented out or genuinely available for rent.

To be genuinely available for rent, a property must be given broad exposure to potential tenants and in a condition that wouldn’t deter a tenant from renting the property.

Partial year deductions are common in holiday homes where tenants may only stay for short periods sporadically throughout the year such as in busier times like school holidays, New Year and on long weekends.

In cases where a property is used for both private and income-producing purposes, the owner is eligible to claim deductions where it is income producing. This amount would be calculated as a percentage. E.g. If the property was used for an income-producing purpose eighty per cent of the time then eighty per cent of all eligible costs are tax deductible.

Another situation where partial year deductions apply is when the property was previously used as a primary place of residence.

Immediate write-off and low value pooling

The immediate write-off rule and low-value pooling can be used to maximise deductions in a partial financial year.

The ‘immediate deduction’ is a straight-forward incentive for residential property investors. It allows an immediate tax deduction for any new asset that costs $300 or less. For instance, if you purchased a light fitting valued at $150 for your investment property, you can claim 100 per cent of the cost in the year of purchase.

Assets that cost, or have a value, less than $1,000 can be placed in a low-value pool. This pool unlocks depreciation sooner, as assets contained within the pool can be claimed at a rate of 18.75 per cent in the year of purchase regardless of the length of time that the property has been owned and rented. After the first year, the remaining balance of the item can be depreciated at a rate of 37.5 per cent per year.

There is a difference between low-cost and low-value assets.

  • Low-cost asset: a depreciable asset that has an opening value of less than $1,000 in the year of acquisition.
  • Low-value asset:  a depreciable asset that has an opening value of greater than $1,000 in the year of acquisition but the value after depreciating over time is now less than $1,000. This will only apply if you have previously used the diminishing value method.

For instance, if you purchased an air conditioning unit valued at $1,700 it can be depreciated using the diminishing value method. Once its depreciable value falls under $1,000, it will then be added to the low-value pool as it’s considered a low value asset. However, if the air conditioning unit was purchased for $950 it would automatically be added to the pool as a low-cost asset.

It’s important to note that once an asset is added to the low-value pool it cannot be taken out. You can take advantage of depreciation deductions at any stage in your investment property journey, ensuring your cash flow is maximised to its full potential.

The article is provided by BMT Tax DepreciationBMT Tax Depreciation is Australia’s leading supplier of residential and commercial tax depreciation schedules. Contact BMT to learn more.

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