Last week we talked about capital gains tax deductions, this week we are highlighting legislation changes from late last year that changed the way depreciation for pre-existing plant and equipment found in second hand properties will be treated. Plant and equipment depreciation cover all removable and mechanical assets which generally depreciate faster than the building.
What is ‘property flipping’?
Property flipping occurs when an investor buys, renovates and resells a property within a relatively short time period with the aim being to make a profit. Leading Australian property data collector and analyst, CoreLogic, report that 90% of properties flipped during 2017 were sold for a profit.
How do the changes impact on second-hand residential properties?
The legislation states that investors who purchase second-hand residential properties after 9th of May 2017 cannot claim depreciation on pre-existing plant and equipment unless the property is deemed to have been substantially renovated or is brand new.
Below are some examples of structural and non-structural works, that in combination could be considered substantial when property flipping:
- Structural: altering, removing or replacing foundations, floors, supporting walls or part thereof (interior or exterior), lifting or modifying roofs, replacing existing windows or doors where brickwork is altered (single to double door)
- Non-structural: replacing electrical wiring or plumbing, replacing, removing or altering non-supporting walls.
So, if a property is considered to be substantially renovated before it is sold, then the plant and equipment depreciation can be claimed on all the removable and mechanical assets by the new owner.
Capital works deductions on the structure of a building including any fixed and irremovable assets were not affected by the new legislation and generally make up 85 to 90 per cent of the total claimable amount. Current investors can continue to claim these deductions for both existing and new additions, regardless of when the work took place.
If you are in the market for a property to ‘flip’ for profit, it is highly recommended you talk to your Agent about a suitable property, and your accountant about the depreciation benefits prior to signing a contract.