When an investor purchases or develops a brand new property, they can either rent it out, or choose to live in it. Depending on the choice, there can be different tax rules applied to it. It is paramount that the investor is well informed of the rules and regulations when making their choice. The tax deductions that an investor can claim vary depending on the choices made.
If the investor chooses to occupy the investment property, it then becomes their Primary Place of Residence (PPOR) as it is the property they will predominately reside in. The tax implications of this is that they are no longer able to claim property expenses such as mortgage repayments, land tax, repairs or maintenance and council rates. It also removes their ability to claim any property depreciation deductions.
Depreciation has two components, Plant and Equipment (Division 40) and Capital Works (Division 43). An investor purchasing a brand new property whether off the plan or developed privately is able to claim on both components if it is rented at the first available instance. This means a Quantity Surveyor can produce a depreciation schedule to capture all assets within including kitchen appliances, air-conditioning units, light shades, etc. If the owner decides to occupy the property first, when they rent the property to a tenant, depreciation is only available on the Capital Works which includes items such as the concrete slab, timber framing, kitchen tops etc.
The above schedule is drawn from our sample report and is a table including the two components of depreciation. As mentioned above, if the owner has previously occupied the property, they will lose their eligibility to claim on Plant and Equipment which totals $22,270. The deductions on this component of depreciation is most effective within the first 5 years and sees a substantial tax saving for the homeowner. Thus it is important to consider the impacts of occupying a property first however it can be said that Capital Works will account for the bulk of the depreciation value when viewed as a long term investment.
Whilst this may seem like a detrimental reason for the homeowner occupying the property at the first instance, it does have enormous longer term taxation benefits; exclusively referring to the capital gains tax benefits on the sale of the property. Typically property owners will live in their property for a short period of time initially after the purchase to minimise their capital gains tax obligations. First home owners grants as well as other Government initiatives are also available to enable Australians to get into the property market. However, it should also be noted that if you do not owner occupy the premises and choose to rent the property out at the first instance (treating it as an investment property), this will still entitle you to reduce your capital gains tax by 50% with the condition that the asset must be held for at least 365 days*.
Ultimately the choice is up to the investor to choose if they would like to live in the investment property or not however it is imperative that they are fully informed of the implications of their choice from both a financial and taxation standpoint.
If you would like further clarification or questions please feel free to contact the Duo Tax Quantity Surveyors office on 1300 185 498.
*This is not taxation, legal or financial advice. Duo Tax urges you to seek advice and recommendations from a qualified adviser/agent to clarify information pertaining to the options that we have discussed with respect to Capital Gains Tax or government grants.
Tuan Duong is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation. Reach out to him directly on 0431 154 356 or email email@example.com