Deciding to move into your investment property is a significant change that affects your ability to claim depreciation. Under Division 40 of ITAA 1997, depreciation on plant and equipment is only claimable when the property is income-producing. Once you occupy the property as your primary residence, these claims must cease. However, any depreciation already claimed remains valid for the period the property was available for rent.
Under Division 43, which covers capital works depreciation, the scenario is slightly different. You can continue to claim depreciation for the period the property was rented, even after moving in. This is because capital works deductions are based on the construction costs and are not impacted by the change in the property's use.
A common misconception is that moving into your investment property allows for continued depreciation claims. This is incorrect; personal use of the property negates future claims under Division 40. It's crucial to understand this distinction to avoid errors in your tax return.
To see how this plays out, consider a practical example. Imagine you own a 2-bedroom apartment in Melbourne, purchased for $750,000 in 2015. For the years it was rented, you claimed depreciation of $5,000 annually on plant and equipment. In 2023, you decide to move into the apartment. From that point, you can't claim further depreciation on plant and equipment, but you can still claim the capital works depreciation for the rental period. At a 37% marginal tax rate, this adjustment in claims impacts your tax liability, reducing potential refunds related to depreciation.
In our experience reviewing thousands of properties across Australia, a recurring pattern is investors failing to adjust their depreciation claims after moving into their investment properties. This oversight often leads to incorrect tax filings and potential ATO audits. Many investors also miss the opportunity to maximise their capital works deductions for the rental period, leaving money on the table.
The answer can differ depending on your situation. If you move into the property within the first year of ownership, your ability to claim depreciation might be minimal. For properties acquired after 9 May 2017, the rules are stricter, especially concerning previously used plant and equipment. Additionally, if the property has been rented out part of the year, your depreciation claims must be pro-rated accordingly. For properties owned by an SMSF, different rules apply, and it's essential to consult with a professional.
Navigating these complexities is where professional advice becomes invaluable. A Chartered Quantity Surveyor can provide a detailed depreciation schedule that aligns with your property's history and future use, ensuring compliance with ATO regulations. Working with an accountant ensures that your tax returns accurately reflect these changes, optimising your tax position.
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