Residential rental property depreciation expenses

The Federal Budget also announced changes to depreciation deductions, but these changes only affect Investors who exchanged contracts for an established residential property after 7.30 pm, 9th May 2017.

The majority of investors, including those who are already claiming depreciation for a property purchased before 7.30 pm, 9 May 2017 (when the federal budget for 2017 was announced), or those who are first time owners of new properties, remain unaffected. Therefore, unless you buy an established residential property as an investment after the above mentioned date, you can continue claiming depreciation for the building as well as plant and equipment assets used in the building as before.

Two kinds of deductions are allowed to property owners who generate income from their properties:

1. A Capital works deductions for structural wear and tear of the property which is calculated by taking into account the construction date, construction cost and type of the property.
2. Deductions for plant and equipment such as heaters, air conditioners, exhaust fans, ceiling fans, carpets and security systems. The deductions for these items are calculated according to their effective life, updated and regularly notified by the ATO.

Until now, any investor purchasing an established residential property could claim depreciation for the second-hand plant and equipment assets that came with the property. For example, if Jane purchased an apartment from Mal who had owned it for the past seven years as an investment property, Jane could claim depreciation on the air conditioner (for the remainder of its effective life) installed by Mal as the new owner of the property.

However, investors exchanging contracts for established residential properties after 7.30 pm, 9 May 2017, will no longer be able to claim depreciation on plant and equipment assets that are acquired as a part of the property. Thus, in such a situation, the air conditioner bought by Mal and acquired by Jane as a part of the established property does not qualify as a depreciable asset for her.

No changes have been made to capital works deductions.