{"id":3951,"date":"2015-03-30T11:08:32","date_gmt":"2015-03-30T00:08:32","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=3951"},"modified":"2015-03-30T11:08:32","modified_gmt":"2015-03-30T00:08:32","slug":"six-capital-gains-and-depreciation-facts-for-property-investors","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/six-capital-gains-and-depreciation-facts-for-property-investors\/","title":{"rendered":"Six capital gains and depreciation facts for property investors"},"content":{"rendered":"

One question investors often ask about claiming depreciation on a rental property is \u2018how will these claims affect Capital Gains Tax (CGT) when the property is sold?\u2019
\nCGT can be a complex topic for investors to understand, particularly as the answer to the above question can really depend on the scenario of the individual property investor.
\nIntroduced on the 20th<\/sup> of September 1985, CGT is basically the tax payable on the difference between what it cost you to purchase an asset and the amount you received when you disposed of it. In the case of an investment property, this is the difference between the original purchase price of the property including any capital buying costs and the price the property is sold for plus any selling costs. When you sell an asset such as a property, this triggers what is called a \u2018CGT event\u2019 and the owner will either make a capital gain or loss on the property.
\nWhen an investor has been claiming property depreciation, the cost base could be altered, therefore changing the capital gain or loss. To help explain the implications of property depreciation on CGT, here are six facts investors should be aware of.<\/p>\n

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  1. What is property depreciation?<\/li>\n<\/ol>\n

    Property depreciation is the wear and tear of a building and the plant and equipment items within it. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a deduction in their annual tax return, meaning they pay less tax. Property depreciation is made up of two main parts; capital works deductions and plant and equipment depreciation.<\/p>\n

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    1. How do capital works deductions affect CGT?<\/li>\n<\/ol>\n

      Capital works deductions are available for the wear and tear on the structure of the building. Examples of items which can be claimed include bricks, walls, floors, roofs, windows, tiles and electrical cabling. The capital works deductions will reduce the cost base of the property which will add to the capital gain and therefore increase the amount of CGT applicable for the owner of the property.<\/p>\n

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      1. How does plant and equipment depreciation affect CGT?<\/li>\n<\/ol>\n

        Depreciation deductions can be claimed for the mechanical and easily removable plant and equipment assets contained within an investment property. When a property is sold, a gain or loss is calculated separately on these items. This is because often these assets will have been updated, removed or replaced over time. This means that the original assets contained in a property at the time of purchase can be very different to the assets contained in the property at the time of sale.
        \nIf an investor were to increase the value of plant and equipment during the time the property is owned (for example by replacing the carpets or completing a renovation) this could increase the cost base of these assets and may therefore reduce the CGT when the owner sells the property. If the value of assets in the property when sold is less than when purchased the cost base will be reduced, therefore increasing the amount of CGT.<\/p>\n

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        1. What CGT exemptions apply for a principal place of residence?<\/li>\n<\/ol>\n

          Properties which are owned by someone who resides, occupies or lives in the property as their home are exempt from CGT so long as the dwelling is used mainly for residential accommodation and is located on land under two hectares in size.
          \nIf the owner of a primary place of residence chooses to move out of their home and rent it out, a CGT exemption is available for up to six years after they have moved out so long as they don\u2019t own another primary place of residence.
          \nIf the owner moves back into their investment property, then moves out and rents the property again, a new six year period will commence from the time they last moved out of the property. There is currently no limit to the number of times a property owner can do this so long as each absence is less than six years.
          \nOnly one property can be classed as a primary place of residence and therefore exempt from CGT at any one time with the exception of the following rules which apply if both properties are treated as the owner\u2019s primary place of residence within a six month period:<\/p>\n