Ask Margaret: what are the tax implications of depreciating my principal place of residence?

Hi Margaret,

I have a brand new property settled in early June 2012. I have lived in it since settlement and claimed it as my principal place of residence until Jan 2013 after which I moved out and rented it out.

I have also obtained a depreciation report and am trying to decide if I should depreciate or not this financial year.

Since I’m claiming this property as my PPOR, if I sell within the six-year rule, what are the CGT implications caused by me depreciating? Will I still be fully exempt from paying CGT?

Furthermore, my depreciation report lists a maximum I can claim every year. Since my property was settled early June 2012 (i.e. in the 2011-2012FY) does this mean this year I would only be able to claim a pro-rated amount on the year 2 figure on the report?

Thanks,

Min

Hi Min,

You have a number of questions here so I will deal with them one at a time:  

1. As you probably know, you have a six-year window from Jan 2013 to either move back in, or sell, to avoid CGT.  Be aware though, that this is only possible as long as you do not own another property in which you live and on which you wish to claim the principal place of residence exemption.  The rule is that only one property can have the exemption – so if you have bought something else to live in, that may be the one you apply the exemption to, therefore losing this six-year window on the one you moved from.

2. Your depreciation report should show you the amount of depreciation available for the remainder of the year and then for each of the subsequent 9 years.  There is no real reason not to claim the depreciation in this FY as it does not roll over or accumulate – therefore not claiming it will not result in a better outcome next year.  Often, due to low value pools and items under $300, there are immediate write-offs for some items which can boost the amounts claimed.

3. There is no CGT impact, as far as I am aware. If we assumed that you bought an item, or the quantity surveyor specified the items and you subsequently write them off each year (as you would from your report) your accountant will most likely treat the depreciable assets as sold at written down value, so there is no write back of depreciation.  My tax expert tells me that the majority of contracts do not specify a value of these items, so the treatment of writing down the value is in accordance with the general rules around depreciation.

4. If you obtained the report when you bought it, rather than when you rented it for the first time, then an adjustment must be made for days rented/days not rented.  If it’s only just been prepared then this report should make allowances for when it first became income producing and provide a figure to be used from that date (therefore the report amount is the full amount which can be claimed).  If you are not sure you should go back to the quantity surveyor and ask them to give you an exact amount calculated from the date it was first rented until the end of the FY.

Remember, I am not a tax accountant or a quantity surveyor and this general information is provided based on my experiences.  You really should consult both of those professionals who can accurately establish your true position in relation to tax.

Margaret Lomas is a best-selling author and writes and hosts the popularProperty Success With Margaret Lomas and heads up the panel onYour Money, Your Call, both on Sky News. She is the founder of Destiny.

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