Claiming depreciation deductions on your own home
In difficult economic times, many property owners with spare rooms in their homes may be able to generate additional income by renting these unneeded rooms out to tenants (where appropriate), including family members and friends.
For those readers to whom this option might be of interest, I thought I would share the following piece provided by BMT Tax Depreciation. It is an excerpt of an article which appeared in the April 2012 issue of CENTURY 21’s Property Investor.
In the current economic climate, more and more home owners are renting out rooms within their properties to generate extra cash. This strategy can be quite lucrative, especially when considering the extra tax deductions that become available. Even when family members pay rent, by declaring the rental income in a tax return, a portion of the expenses and depreciation may be claimed as a deduction. BMT Tax Depreciation is dedicated to helping home owners maximise their property depreciation deductions and improving their cash return.
The Australian Taxation Office (ATO) has a preferred method of calculating the proportion of expenses that can be claimed as a deduction under the Taxation Ruling Number IT 2167. This ruling sets out the ATO’s general approach of apportionment based upon floor areas. The ruling states that it is appropriate to add the floor area where the tenant has sole occupancy of up to 50 per cent to the general living area the tenant shares equally with the owner/occupier. It is necessary to only include general living areas the tenant has access to.
A portion of relevant property deductions can be claimed by the owner including property depreciation, which is a deduction available for the wear and tear on the fixtures, fittings and structure of a building. A portion of other expenses such as insurance, rates and the interest payments made on the mortgage of a property may also be claimed.
(Please visit the original article in Property Investor for an example of an owner-occupied house with two bedrooms generating income for the owner, showing the tax deductions available and the resulting improvements to the owner’s cash flow.)
When renting a room out in an owner-occupied property, it is important to obtain a property depreciation report from a specialist Quantity Surveyor such as BMT Tax Depreciation. This will ensure the tax deductions are maximised. It is also important to discuss the options available with an accountant. When a home is changed into a partial investment property, some Capital Gains Tax (CGT) may be triggered if the property is later sold. However, there are scenarios which may reduce or create a total CGT exemption depending on the property’s first use, how long the property was lived in, how long it is income producing and if the owner purchases another home.
For more information on BMT Tax Depreciation’s Australia-wide services, please contact 1300 728 726.