As proposed in the federal budget on 10 May 2017 and now law, there are changes to claiming depreciation on rental properties. If you acquire a residential investment property which contains “previously used” depreciating assets e.g. whitegoods and appliances, you will no longer be able to claim the depreciation on those assets. They apply to any asset acquired from 10 May 2017 which is not new.
Acquirers of brand new investment properties will carry on claiming depreciation exactly the way they have done so to date. The proposed changes only relate to residential investment properties. Commercial, industrial and retail and other non-residential properties are not affected by the current changes. The division 43 building allowance i.e. depreciation on structural upgrades has not changed and this will still be claimable moving forward. These rules do not apply to companies, managed investment trusts, public unit trusts and superannuation funds other than self-managed funds.
The federal government has passed this bill to help shift demand from established rental properties to newly constructed properties to assist with the current housing shortage. Subsequently this may have an effect on the sale price of established properties given the tax benefits are not as attractive as new properties. The tax benefit is not completely forgone as the unclaimed depreciation can now be used to reduce the capital gain when the rental property is disposed. Below is an example: A taxpayer buys an investment property in September 2017 for $800,000, included within that property are previously used depreciating assets comprising of a deduction of $20,000. As at March 2025 the taxpayer sells the property for $900,000, which includes $5,000 of those depreciating assets. The taxpayer can now offset the forgone depreciation to be applied against the proceeds on sale of the asset as follows: Forgone depreciation: $20,000 – $5,000 = $15,000. This reduces the capital gain on disposal, and reduces tax payable. If you are considering acquiring a rental property, we recommend you contact us to discuss these changes and the effect they may have on your investment return.
This article appeared in our September 2017 newsletter