Email: temora@auswildbroad.com.au | Phone: (02) 6978 0077 |
How depreciation affects capital gains tax (CGT) is a frequently asked question among investors.
Here are some facts you need to know.
Many investors aren’t aware of CGT discounts and exemptions such as the 50 per cent discount, the main residence exemption, the 6-month rule and the 6-year rule.
Being unaware of these discounts and exemptions at the start of their investment journey can result in many property investors opting out of claiming depreciation. Doing so can mean they miss out on thousands, often tens of thousands, in depreciation deductions.
The 50 per cent CGT discount is especially beneficial to investors. Most property sales are more than twelve months after the purchase date. So, most would have the 50 per cent discount available, which further enhances the depreciation claim during ownership.
The 2017 depreciation legislation changes mean some investors who own a second-hand rental property can’t claim depreciation on previously-used plant and equipment assets.
A specialist quantity surveyor will include a capital loss schedule of ineligible plant and equipment assets. CGT Event K7 can be used to establish this capital loss in the year, even if the property wasn’t sold. Depending on the individuals scenario, CGT Event K7 can influence payable CGT, or have a nil effect.
None of us can predict the future, even with the most robust property investment strategy.
We know that CGT is usually only payable on the capital gain made from the sale of an investment. Depending on the market and other economic factors, it’s possible that an investor could end up selling their property at an overall capital loss.
While this isn’t ideal, CGT doesn’t apply in these situations. This means the investor could’ve claimed maximum depreciation deductions without paying CGT, but they missed out because they chose not to.
An investor’s personal circumstances can change unexpectedly, too. If the property becomes the owner’s physical home prior to the sale, the main residence exemption, and other exemptions, could apply. They therefore could have missed out on claiming depreciation when the property was an investment.
The key takeaway here is that investors shouldn’t decide whether they should claim depreciation on their fortune-telling knowhow. This especially applies to investment properties as they are usually a longer-term commitment.
Most of us wouldn’t decline a pay rise because it requires us to pay more tax. The same could be said for claiming depreciation and CGT.
The cash flow depreciation provides throughout an investor’s ownership period far outweighs the difference it can make to CGT. This financial boost can help them on their investing journey and provides the opportunity to reinvest the cash into other sources of capital.
Agree to subscribe terms!