The Federal Government has provided clarity on the changes in the May 2017 Budget. The changes will have an impact on second hand investment property purchased after this date. The key points are as follows:
1. You will not be able to claim depreciation for existing plant and equipment that existed at the time of purchase for any Second Hand property purchased after May 10, 2017.
2. For second property you will still be able to claim capital depreciation based on the historical build cost over the buildings remaining useful life - up to 40 years. In other words if the property is 20 years old you will only be able to claim build depreciation for the remaining 20 years based on what it cost to build the property 20 years ago. You can not base it on what it would cost to build today.
3. Purchasers of brand new properties will be able to claim full depreciation of plant and equipment and full depreciation of capital costs at today's costs.
The first point in particular substantially reduces the tax-effectiveness and potential cashflow of second hand property.
The first point also applies to home owners who want to switch their home to an investment property. They will not be able to claim any deductions on existing plant and equipment, only on plant and equipment installed after the property is available for rent. Making this appraoch even less attractive.
Due to the loss in tax benefits we estimate the holding costs on a $450,000 second-hand would be approximately $5,000 higher per annum compared to a brand new property for the same price. $25,000 extra over 5 years is a substantial difference.