Tax Q&A: Inheritance of Existing Investment Property

By

5/07/2018


Q: I have a question related to depreciation. I bought a new apartment in July 2016 and lived in it for 13 months. I started to rent the apartment from the end of October 2017. My question is, following the change to depreciation rules, am I able to claim depreciation for plant and equipment (dishwasher, fridge, etc)? 

The property was brand new when I bought it, so I’m hoping depreciation benefits will still be available. I also have a query regarding depreciation and inheritance. If a married couple have an investment property and they are claiming plant and equipment depreciation, and then one spouse dies, can the surviving spouse (who inherited the existing investment property) continue to claim the plant and equipment depreciation?
 - Many thanks, Sam  
 

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A: With regard to your first question, unfortunately you won’t be able to claim depreciation on existing plant and equipment assets due to the recent change in the depreciation legislation in May 2017. 

These changes affect second-hand investment properties that were purchased and/or rented after 1 July 2017, as in your case. In these situations, plant and equipment assets are considered pre-existing and previously used. 

The depreciation on your plant and equipment assets began when you purchased your property.                     

But they only became depreciable against your income when you started to rent out the property after 1 July 2017. You can claim plant and equipment items such as a new dishwasher, fridge, etc., if you bought these new and installed them in your second-hand property. 

"You won’t be able to claim depreciation on existing plant and equipment assets due to the recent change in the depreciation legislation"

The other scenario in which you can claim depreciation is when you buy a new residential investment property such as a house or apartment, including 
all assets, direct from a developer or builder. 
The new legislation did not change the rules on claiming the building component of a residential investment property, so not all is lost 
on claiming a tax deduction on second-hand properties purchased after 1 July 2017. 

Any property owners who were leasing their residential investment properties before 1 July 2017 can continue to claim the depreciation on their assets until they replace particular assets or sell their residential property investment.

In regard to your second question, in this case the spouse’s ability to claim 
will depend on the date the property was inherited. If it was before 1 July 2017, you can continue to claim the depreciation on your assets, plus building allowance, based on the values of the original inherited depreciation.

But if the property was inherited after 1 July 2017, your claim will be allowed only on the depreciation value of the building allowance. 
As in the above case, the assets are considered pre-existing and previously used so are not allowed under the new changes.

The above rules also apply to investors who inherit a property from family members, relatives, friends, de factos or divorcees. 

Of course, if you were lucky enough to win a property through a raffle or competition and then sold it on, the same rules would apply to the respective owners.  

Need to know
- Changes in legislation have impacted depreciation claims on existing plant and equipment assets.
- Plant and equipment assets can only be depreciated if bought new.
- If the property was first leased before 1 July 2017, different rules apply.


Paul Mazoletti
National director of NBtax
by Napier & Blakeley

 

 

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