Purchasing a property at auction can be an exciting experience, but it also raises questions about your ability to claim depreciation. Simply put, yes, you can claim depreciation on a property bought at auction, but the specifics depend on several factors, including the property's age, use, and purchase date.
Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment, which includes items like air conditioners, carpet, and appliances. However, following the 2017 budget changes, if you acquired a second-hand residential property after 7:30 pm AEST on 9 May 2017, you cannot claim depreciation on previously used plant and equipment. This rule was introduced to prevent double-dipping on tax claims for these assets. For properties acquired before this date, or new builds, the ability to claim remains unaffected.
Under Division 43, you can claim capital works deductions, which apply to the building's structure and permanent fixtures. These deductions are typically available for properties built after 16 September 1987 and can be claimed over 40 years at a rate of 2.5% per annum.
To see how this plays out in practice, consider a 2009-built 2-bedroom apartment in Fortitude Valley, Brisbane, purchased at auction for $750,000. Assuming eligible plant and equipment were valued at $30,000, and capital works at $150,000, the first-year depreciation claim could be around $4,500 for capital works and $3,000 for plant and equipment. At a 37% marginal tax rate, this reduces your tax bill by approximately $2,775 in the first year.
In our experience reviewing thousands of properties across Australia, investors often overlook the importance of a detailed depreciation schedule prepared by a Chartered Quantity Surveyor. Many assume that older properties offer no depreciation benefits, missing out on significant tax savings from capital works. Another common oversight is neglecting to claim depreciation on renovations completed by previous owners, which can still be eligible under certain conditions.
The answer can differ depending on your situation. If you purchased a property after 9 May 2017, only new plant and equipment installed by you post-purchase can be depreciated. For commercial properties, the rules differ, allowing depreciation claims on second-hand assets. If you own a property through an SMSF, the depreciation rules apply similarly, but it's crucial to ensure compliance with both tax and superannuation laws.
Determining depreciation eligibility and maximising claims can be complex. A Chartered Quantity Surveyor can provide a detailed depreciation schedule tailored to your property, ensuring you capture all possible deductions. Additionally, consulting with your accountant will help integrate these deductions into your overall tax strategy.