Once a main residence turns into an investment property, tax reporting requirements change.
You will be able to claim property expenses such as interest costs, maintenance and management fees as tax deductions. On the flip side, the rental income you receive will become assessable income for that financial year.
In addition to increased tax-deductible expenses, you will be able to claim depreciation deductions.
Depreciation is the natural wear and tear of a building and the assets within it over time. The Australian Taxation Office allows investors to claim this depreciation as a tax deduction.
An investor can claim depreciation deductions under two categories. The first category is capital works deductions, which refers to the structural assets of the property. BMT finds that capital works deductions typically make up between 85-90 per cent of a total depreciation claim. The second is plant and equipment, which refers to the easily removable fixtures and fittings.
Under current legislation, you won’t be able to claim plant and equipment deductions for previously used assets. A Tax Depreciation Schedule will allow you to claim capital deductions on a percentage basis, aligned with when the property was used for income-producing purposes.
Property owners sometimes think that it’s not worth getting a depreciation schedule for an older property. While it’s true that new properties may receive higher deductions due to holding assets with more depreciable value available, all investment properties will have deductions for the owner to claim.
The main reason for this misconception is because if a building was constructed before 15 September 1987, the investor can’t claim capital works depreciation on the structure. However, any capital works renovations since this date, and eligible plant and equipment, will still attract depreciation deductions.
Your main residence is exempt from Capital Gains Tax (CGT). However, once your main residence turns into an investment property, some CGT can be triggered when the property is eventually sold.
It’s important to discuss this with your accountant as each scenario is different. The CGT calculation is based on many factors such as how long it was your main residence, how long it produced income and if the owner has another main residence.
Landlord insurance isn’t the only thing you need to think about when protecting your investment property.
The home and contents insurance you previously had on the property will no longer be suitable once the property is an investment. This is because an investment property is subject to different types of risks when compared to a main residence. Once you decide to make your main residence an investment, you need to discuss your insurance needs with your provider. Failing to do so could result in your property being underinsured.