Tax Q&A: Depreciation Tax Deductions

By Contributor | 02 Aug 2019

Q: I am considering renting out a room in my newly renovated house with an en suite that would be solely for the tenant’s use.
I understand that in the process it would become a source of income, so what tax deductions would I be entitled to?
Also, should I be doing a depreciation scale on the whole house instead of just the room/en suite?

Finally, can I claim a full tax deduction on the depreciation, or is it just a percentage that depends on the floor space leased in relation to the total floor space of the house?
Can I include land space for shared common areas?

Kind regards, Rebecca

A: Thanks for your question! With the current state of housing affordability in many of Australia’s capital cities, renting out a room or a portion of one’s premises has become increasingly popular. We encounter this situation and question regularly.

Firstly, depreciation is a tax deduction available to property investors. It allows you to claim a tax deduction for the wear and tear over time of any eligible old or new investment property. Basically, it recognises that the building itself, plus its internal furnishings and fittings, will become worn over time and will eventually need to be replaced.

A tax depreciation schedule is a document that provides your accountant with the proper information regarding depreciation claims on your investment property. Simply put, the depreciation schedule contains relevant data regarding the compensation for wear and tear of the building. Tax depreciation deductions are only available to properties or the portion of a property that is available for income-generating purposes.

As you will be receiving and declaring a rental income from the room and en suite, you will certainly be able to claim tax depreciation deductions on this.

To correctly calculate your deductions, a tax depreciation report should initially be prepared for the entire property. This ensures that any and all common areas are included.

The deductions you are eligible to claim will be based on the proportion of the property that is exclusively used to generate income (ie the room and en suite) as well as a percentage of the shared common areas calculated on a pro rata basis.

New depreciation legislation announced in May 2017 has changed what items can be claimed and who is eligible to claim.

The new ruling indicates, for instance, that the following depreciation deductions are no longer allowed:

  • Previously used plant and equipment acquired at or after 7.30pm on 9 May 2017 unless it was acquired under a contract entered into before this time
  • Plant and equipment acquired before 1 July 2017 but not used to earn income in either the current or previous year

A reputable and accredited depreciation specialist fi rm will be able to check that it is worthwhile for you to proceed with a report before you commit.

I also recommend you speak to your financial advisor and/or accountant to discuss any capital gains tax implications that may now become relevant because you have rented out the room. You may not qualify for the full capital gains tax exemption as you have earned income from your principal place of residence.

Need to know

  • A tax depreciation schedule contains your depreciation claim information.
  • Depreciation laws changed in 2017 with respect to some items and eligibility.
  • Deductions are based on the proportion of the property that is used to generate income.

Tyron Hyde
is CEO of Washington Brown



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