Changes to residential rental property deductions announced in the May 2017 Federal Budget were passed by parliament on 15 November 2017. The changes apply to limit allowable depreciation and travel deductions in regard to residential properties.
Who do the changes apply to?
The changes impact the majority of residential rental property owners including individuals, self-managed superannuation funds and most trusts and partnerships.
The restriction on deductions do not apply where the costs are incurred in carrying on a business or for corporate tax entities, superannuation funds other than self-managed funds, public unit trusts, managed investment trusts or partnerships or unit trusts including only these types of entities.
What deductions are no longer allowed?
Travel expenses previously allowed in regard to inspecting, maintaining or collecting rent for a residential property cannot be claimed from the 2017/2018 income tax year.
Depreciation deductions for plant and equipment in second hand properties
For second hand residential rental properties purchased on or after 7:30pm on 9 May 2017, property investors can no longer claim depreciation for previously used plant and equipment. The changes mean that depreciation is not allowed on such assets as floor coverings, air-conditioning and appliances within the property at the time of purchase.
The rules do not change depreciation claims allowed for properties purchased prior to 9 May 2017 unless the property was held earlier but not rented until after 1 July 2017 (for example if the owner used the property as a primary place of residence and decides to rent property out after 1 July 2017).
Importantly the new rules do not apply to capital works so the deduction for structural and fixed items contained within an investment property are still allowed. Depending on the date of construction, capital works deductions of 2.5% or 4% per annum may apply for the construction cost of the property. Therefore it is still important to obtain a quantity surveyor report on purchase of investment properties to determine allowable deductions.
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