Investors often wonder if they can claim depreciation on a property that hasn't yet been rented. The key lies in whether the property is genuinely available for rent. If it's actively being advertised and ready for tenants, you may be eligible to claim depreciation under Division 40 for plant and equipment and Division 43 for capital works.
How Depreciation Works for Unrented Properties
The Australian Taxation Office (ATO) allows property investors to claim depreciation on assets if the property is genuinely available for rent. This means the property must be actively advertised and in a condition to attract tenants. Under Division 40 of the ITAA 1997, you can claim depreciation on plant and equipment, while Division 43 covers capital works. The most common misconception is that the property must be tenanted to claim these deductions, which is not the case as long as the property is genuinely available for rent.
How This Works in Practice
Consider a 2015-built 3-bedroom townhouse in Richmond, Melbourne, purchased for $850,000. The property has been advertised for rent since purchase but remains untenanted. The plant and equipment, valued at $50,000, can be depreciated under Division 40. Assuming a depreciation rate for these assets, you may claim approximately $5,000 in the first year. The capital works, valued at $300,000, can be claimed over the property's effective life under Division 43, resulting in an additional deduction. At a 37% marginal tax rate, these deductions could save you around $1,850 in tax in the first year, even without a tenant.
Professional Insight
In our experience, many investors mistakenly believe they can't claim depreciation unless their property is tenanted. One thing we frequently see is properties not being properly advertised or held in a condition that genuinely attracts tenants, which disqualifies them from claiming deductions. What most investors don't realise is that the ATO scrutinises claims to ensure properties are truly available for rent. Actively advertising and maintaining the property in rentable condition is crucial. Also, investors often miss claiming initial depreciation in the year of purchase, which can significantly impact their tax position.
When Does the Answer Change?
- Post-9 May 2017 Changes: If you purchased a second-hand residential property after this date, you cannot claim Division 40 depreciation on previously used plant and equipment.
- Pre-1987 Buildings: Properties built before 1987 may not be eligible for Division 43 deductions unless structural improvements occurred after this date.
- SMSF-Owned Properties: Different rules may apply, and professional advice is essential.
- Partial Year Purchases: Depreciation can only be claimed for the portion of the year the property was available for rent.
When Should You Seek Professional Advice?
You should consult a Chartered Quantity Surveyor if you're unsure about the depreciation potential of your unrented property. Situations like mixed-use properties, significant renovations, or complex ownership structures often require professional insight. An accountant can ensure your tax return accurately reflects any depreciation claims.