Short-term rentals, such as those listed on Airbnb, offer a unique opportunity for property investors to maximise their income. However, they also bring complexities to depreciation claims. Under Division 40 of ITAA 1997, you can claim depreciation on plant and equipment, while Division 43 covers capital works. The 2017 budget changes have tightened the rules, especially for second-hand properties, impacting how you claim these deductions.
The primary misconception is that short-term rentals can be treated the same as long-term leases regarding depreciation. This isn't true, particularly due to the 2017 restrictions on Division 40 claims for second-hand properties acquired after 9 May 2017, which removed the ability to claim depreciation on previously used plant and equipment. This means that if you purchase a property now and use it as a short-term rental, you cannot claim depreciation on second-hand assets like appliances or furniture.
To see how this plays out, consider a 2015-built 3-bedroom house in Bondi, Sydney, used as a short-term rental. Suppose the property was purchased for $1.2 million with $150,000 attributed to plant and equipment and $200,000 to capital works. Assuming a 50% usage for rentals, you could claim depreciation on the capital works under Division 43, but not on the second-hand plant and equipment due to the 2017 changes. This results in a potential depreciation claim of $5,000 annually for capital works, reducing your tax by $1,850 at a 37% marginal tax rate.
In our experience reviewing thousands of properties across Australia, we find many investors overlook the importance of maintaining detailed records of personal versus rental use. This oversight can lead to incorrect claims, especially if the property is used for personal purposes outside of rental periods. Many also miss the opportunity to update depreciation schedules annually to reflect changes in usage or improvements made to the property. Lastly, failing to differentiate between short-term and long-term rental rules often results in missed deductions.
The answer can differ depending on your situation. If you acquired a property before the 2017 budget changes, you may still claim depreciation on second-hand plant and equipment. Similarly, properties owned by companies or trusts may have different tax implications. For properties used partially for personal use, you must proportionately adjust your claims based on rental versus personal use. Additionally, properties constructed before 1987 generally do not qualify for capital works deductions unless improvements have been made.
Given the complexity of these rules, engaging a Chartered Quantity Surveyor and your accountant is crucial. They can provide tailored advice, ensuring you maximise your deductions while complying with ATO regulations. They will help you maintain accurate records, update depreciation schedules, and understand the nuances of how short-term rental use affects your tax obligations.