Tax Tip 98: Depreciation and renting out a former main residence

Depreciation and renting out a former main residence

This simple strategy to increase tax deductions.

@BMT Tax Depreciation has recently pointed out* the potential benefits of using the Prime Cost method of depreciation on a property that was formerly the main residence but is later rented out.

The Diminishing Value method generally results in a higher claim in the early years, but where you are living in the property you will generally not be able to claim depreciation at this point and the higher deductions will be wasted.

The Prime Cost method generally results in a higher claims in later years (generally from about year 4 or 5 onwards) so this Prime Cost method of claiming depreciation may result in greater tax savings in situations like this.

*On this thread Depreciation: Prime Cost Method vs. Diminishing Value Method See BMT’s PDF with the graphs too.

 

My current apartment came with a depreciation report from the developer, sent after our settlement 2.5 years ago.

Do you think it worth re-doing the report with another provide, if we decided to rent it out now or should we just follow what has been provided.

 

This question is best answered by a depreciation expert like BMT or Depreciator.

 

I would get the Schedule reworked to start when you move out. All the information necessary to do that will be in the existing Schedule.
The new Schedule will have the DV and PC methods for you to choose from. You will likely go with the DV method.
Assets will be reduced in value to reflect the fact that you have owned them for a couple of years to arrive at a written-down value as of when you start renting the place out. But they do not need to be written-down aggressively i.e. you don't need to follow the trajectory of the DV method from when you took possession.
Scott

 

Depreciator's answer is a good one. What I would definitely double-check is whether the developer's schedule was done through a third party. It could then be easily tweaked rather than you needing to get a new schedule.

If it was provided by the developer (using their actual construction costs) then maybe it can still be adjusted by them but it will be worth asking providers what their results have been in the development. It's entirely possible their estimated values may have been higher than the actual values, in some cases to an extent that will justify purchasing a new schedule.

People try to order depreciation schedules from us all the time before they've actually set a concrete date to move out (they just know that their PPoR will become an investment property). What many don't realise is that the date available for income is important. No, the tide of depreciation can't be stopped but it can be held back. The tax rulings provide us with the tools to decelerate deductions until such time as they can actually be claimed. And, once the property is an investment and you have your schedule (with both DV and PC methods), talk to your tax agent about which method is right for you.

 

Keep in mind that laws have dramatically changed since this thread was started and now it is not possible to depreciate second hand items

 

I should have said 'generally not possible'

Companies can still claim depreciation on second hand items, for example

 

Properties that are primarily commercial in usage also still follow the old rules. Plant and equipment assets restart their lifespan with each change of hands and are revalued from the settlement date. So, all of the above is still relevant to those investing in commercial property.

 

And bear in mind the building allowance Div 43 is prime cost in every instance over the 40 year effective life (2.5%). And those with Div 40 plant & equipment depreciation cant change methods.