First home buyers seem to be a popular topic of discussion in Australia. They’re either getting a lot of government incentives and grants on the one hand, or they are finding it tough to get into the property market due to rising house prices on the other.
Over the years I’ve been invited to talk at various conferences. Just recently, at the end of one of my presentations, a young, fresh-faced lad raised his hand and asked me: ‘I’m a first home buyer and I plan to live in my property for a year then move out and turn that property into a rental. Can I still claim depreciation when I move out?’
Now, each state has its own first home buyers incentive schemes (or first home owner grants as they are sometimes called) and they are continually changing. But the simple answer is yes and no!
After the 2017 Budget, you will only be able to claim depreciation on the structure of the building if you use the property as your principal place of residence initially. You will no longer be able to claim depreciation on the plant and equipment when you move out as those assets will now be deemed as previously used. However, see my hacks in Chapter 7 specifically for first home buyers.
You must occupy the home as your principal place of residence for a continuous period of at least six months, commencing within one year of the completion of the transaction to which the application for the first home owner grant relates.
The (tax) law
The Income Tax Assessment Act 1997 determines what types of properties qualify for the building allowance write off deduction.
According to Section 43-90 ‘residential accommodation’ is classified as a type of property that can attract building depreciation allowances, providing that was its intended use at the time of completion.
Luckily for first home buyers, this requirement is satisfied even if the accommodation was intended to be used for private purposes or to be owner-occupied after its completion. The important part of the Act relates to how the property is used in the ‘current year of use’.
Put simply, it’s OK to live in the property for six months or so then move out and claim depreciation on the building. But before all the first home buyers get excited, let’s drill into the nitty-gritty of this and the potential savings or benefits.
First of all, let me point out that the first home buyer grant currently favours buyers who purchase brand-new property. By favouring new property, the government is hoping to stimulate building activity which is generally the first industry to lead the way out of a recession.
The building industry also stimulates other industries such as retail (people need to buy new TVs, lounges and other items when they move into a new home and this has a knock-on effect on the wider economy).
The table below Table compares the effects of buying different property types and renting them out immediately with a first home buyer buying and moving straight into the property.
I also show you the difference between using the diminishing value method, which accelerates the allowances you can claim, and the prime cost method, which evenly spreads out the allowances you can claim.
Both methods were covered earlier in the book. The one you use will depend, in large part, on how long you intend to use the property as an investment.
There are two things that become obvious from these examples:
- The amount a first home buyer can claim is affected while they live in the property. This makes sense because while you live in the property, it is still depreciating but not generating an income, so you can’t claim the depreciation as a tax deduction.
- The 2017 Budget has reduced the amount a first home buyer will be able to claim if they live in it straight away because they will only be able to claim the building allowance, not the plant and equipment, which is now deemed ‘second-hand’, when they move out and turn it into a rental property.
As the first home buyer will only be claiming the building allowance to claim part of construction costs, they can only utilise the prime cost method. This is an allowance fixed at 2.5 per cent per annum of the actual construction cost from the time the property is built.
New vs old property being rented and depreciation allowance
Scenario 1: Property investor purchases a new property and rents it out immediately. How much can be claimed?
Scenario 2: First home buyer purchases a new property after the budget on 9 May 2017 – lives in it straight away for one year