Depreciation is a crucial aspect of property investment, allowing you to offset the decline in value of your investment property against your taxable income. When it comes to strata properties, the same principles apply, but with added layers due to shared ownership of common areas.
Under Division 40 of the ITAA 1997, you can claim depreciation on plant and equipment assets within your strata property, such as air conditioning units, carpets, and hot water systems. Meanwhile, Division 43 covers capital works deductions for the structural elements of the building. This includes the building itself, as well as common areas and shared facilities like lobbies, gyms, and pools.
A common misconception is that you cannot claim depreciation on strata properties, particularly for second-hand assets. However, the 2017 budget changes only restrict claiming Division 40 depreciation on previously used plant and equipment for properties acquired after 7:30pm AEST on 9 May 2017. Capital works deductions under Division 43 remain unaffected.
Take a practical example: Consider a 2015-built, 2-bedroom unit in a Sydney strata complex purchased for $800,000. The building has shared facilities like a gym and pool. While you cannot claim Division 40 depreciation on second-hand plant and equipment if bought post-budget changes, you can still claim Division 43 deductions on the building structure and your share of common areas. Assuming a 2.5% annual deduction rate, you could claim around $10,000 annually. At a 37% marginal tax rate, this reduces your tax bill by $3,700 in the first year.
In our experience reviewing thousands of properties across Australia, many investors overlook the potential of common area deductions in strata complexes. Common areas often house significant assets that contribute to depreciation claims, yet investors miss these due to lack of awareness. Another observation is the failure to update depreciation schedules following renovations or upgrades, which can significantly alter potential deductions.
The answer can differ depending on your situation. For instance, if you acquired a second-hand property post-9 May 2017, you cannot claim Division 40 depreciation on the existing plant and equipment. However, if you were a pre-existing owner, you're grandfathered under the old rules. Additionally, buildings constructed prior to 1987 generally don't qualify for Division 43 deductions unless they have undergone substantial renovations.
Given the complexities involved, engaging a Chartered Quantity Surveyor to prepare a detailed depreciation schedule is advisable. This ensures all eligible deductions are captured, especially for shared assets in a strata context. An accountant can further tailor this information to your personal tax situation, ensuring compliance and maximising tax benefits.