There is also a ‘capital works deduction’ that may be used in relation to rental property. It is necessary that the construction occurred or commenced after 17 July 1985 if the house is rented out for residential purposes. The building write off, also known as a Division 43 Allowance, is based on the construction costs of the building/house rented out. There is an annual 2.5 percent of the original construction cost deduction, depending on the date of commencement of construction and the type of structure.
In addition to this, various elements of the property’s fixtures, fitting and furniture, known as Division 42 allowances, depreciate over time at different rates. A depreciation schedule that reflects this should be created for each property by a qualified Quantity Surveyor.
Depreciation can provide great taxation benefits when a home is relatively new but tax deductions against present income will impact the capital gains cost base on the eventual sale of the property. That is, the amount claimed in depreciation now is liable to be deducted from the capital gains cost base on the eventual sale of the property. Having said that, even when this adjustment is made, it is usually far more advantageous for a property investor to claim these things along the way, as the adjustment is generally only a fraction of the benefit.
So far we have looked at the potential impact the investment can have on the investor’s income tax liability.
Next we will look at the tax levied on the capital growth in value of the investment property over time.