Nicola Woodward MRICS CTA discusses the changes in the calculation of tax depreciation for plant in second-hand residential rental properties.
Overview
In the 2017-18 Budget, the Government announced measures designed to reduce pressure on housing affordability. The tax legislation in relation to investment properties was amended as part of these measures with the intention of limiting deductions.
The purpose of the amendments is to stop entities claiming overstated deductions relating to their rental properties by ‘refreshing’ the values of previously used depreciating assets in residential rental properties.
Changes to the definition of plant and equipment in a tax ruling in 2004 had already impacted on the amount of depreciation available in residential rental properties.
The impact of the legislation is to defer the benefit of deductions for the decline in value of depreciating assets until the sale of the property where a second-hand property is acquired. This also includes low value pool assets.
The effect of the legislation is that amounts that would previously have been claimed under Division 40 are aggregated at disposal and forms the basis of a CGT event K7. In most instances, this will result in a capital loss that will be offset against the capital gain incurred on the sale of land and buildings.
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