To make the most of their property depreciation deductions, investors should consider the benefits of using split reports where there is more than one owner. Investors should also be aware of the capital works allowance to ensure they are claiming the correct percentage of their expenses.
Benefits of multiple owners
Properties with multiple owners can create a complex tax situation, but a split depreciation report makes life easier for accountants by dividing depreciation deductions. This ensures investors’ claims are maximised for any percentage combination of ownership.
When applying depreciation legislation to assets for properties with multiple owners, the cost threshold depends on each owner’s interest in the asset. For example, assets valued at less than $300 are usually written off immediately. However, in a 50:50 ownership situation, items under $600 can be written off immediately. Similarly, assets must be valued at less than $1,000 to qualify for the low-value pool for properties with a single owner. In a 50:50 ownership situation, items that are valued under $2,000 qualify for accelerated depreciation.
Compare the difference
To examine the impact of the split report, we selected a list of 10 fixtures normally found in a residential property with a total value of $27,462. The deductions allowable with and without the 50:50 ownership split were calculated and the results are shown in the table below.
Splitting the ownership of these assets has allowed for accelerated depreciation by qualifying more assets for immediate write-off and the low-value pool, creating an additional $2,099 in tax deductions. This approach can be applied with any number of owners and ownership percentages – for example, two owners at 60:40 or four owners at 70:15:10:5.
Building write-off claims
The ATO introduced legislation on 18 July 1985 that allowed property investors to claim capital works allowance (Division 43), commonly known as building write-off, on residential properties. Under the legislation, building write-off can be claimed at 4 per cent over 25 years for structures that commenced construction between 18 July 1985 and 16 September 1987. For structures commenced after this date, the allowance adjusts to a rate of 2.5 per cent over 40 years. It is important to note that the 4 per cent capital works allowance will soon be exhausted for properties which fall within the above dates.
Case study
On 1 July 2010, a property investor purchased a residential property that had commenced construction on 1 October 1986 and was completed on 1 April 1987. The original construction date of the property fell within the 4 per cent era. Hence the investor was able to claim 4 per cent of the historical construction cost, which was estimated at $180,000, excluding plant and equipment. This equals $7200 in building write-off deductions in the first year of ownership. In the second year, the owner was able to claim the remaining portion of the original building write-off. In the third year, there will be no original building write-off remaining.
A $50,000 extension was added to the property in 1995, qualifying for the 2.5 per cent claim. This equates to a deduction of $1250 per year and will continue through to 2035. In addition, the depreciation available on the plant and equipment will also continue, as can be seen in the below table.
A final word
When purchasing an investment property, check the remaining building write-off as this will affect the depreciation deductions and therefore the property’s cash flow potential.
