Co-ownership investment property: how depreciation deductions work between owners

Co-ownership occurs when two or more people hold a legal interest in the same property.

For tax purposes, the distinction between joint tenants and tenants in common is important.

For co-owners who are not carrying on a rental property business, the Australian Taxation Office (ATO) requires rental income and expenses to be divided according to each owner’s legal interest. A private agreement to allocate deductions differently does not override the legal ownership interests.

This same co-ownership split generally needs to be reflected when depreciation deductions are calculated.

Tax depreciation allows eligible property investors to claim deductions for the decline in value of an investment property’s structure and qualifying assets.

The two main categories are:

Co-ownership affects how these deductions are attributed because each investor’s legal interest needs to be considered.

For eligible residential investment properties, capital works deductions are generally available at 2.5 per cent per year for up to forty years from the date construction was completed.

Capital works can include qualifying expenditure on items such as:

The property’s construction history also matters. Residential properties where construction commenced after 15 September 1987 may qualify for capital works deductions, while qualifying renovations and improvements completed later can create deductions even when the original building is older.

A specialist quantity surveyor can identify qualifying construction, including renovations completed by previous owners, and estimate construction costs where appropriate.

Plant and equipment assets depreciate over their depreciable effective life, as determined by the ATO.

Examples can include:

For residential properties, deductions for previously used plant and equipment can be restricted. Due to 2017 legislative changes, investors cannot claim depreciation on previously used plant and equipment assets. Eligible new assets subsequently purchased for an income-producing property can still provide deductions.

For co-owned assets, each investor’s interest in the asset is considered separately. The ATO works out an investor’s decline in value based on the cost of their interest in the asset, rather than simply treating the asset as though it belonged to one taxpayer.

A tax depreciation schedule accounts for the property’s ownership structure so each investor’s deduction is allocated correctly.

Consider two investors who own an eligible rental property as tenants in common, with Alex holding 70 per cent and Sam holding 30 per cent.

If an eligible capital works deduction for the property is $10,000 for the financial year, the deduction would generally be divided according to their legal ownership:

Alex 70% $7,000

Sam 30% $3,000

Total 100% $10,000

The owners cannot simply decide that Sam will claim a larger proportion because Sam has a higher taxable income or would receive a greater tax benefit. The ATO requires co-owners to attribute rental income and expenses according to their legal interests where they are not carrying on a rental property business.

For investors, this means the ownership structure needs to be confirmed before depreciation deductions are allocated in the schedule.

For co-owned depreciating assets, the immediate deduction threshold can apply to each investor’s interest in the asset, rather than the total purchase price. Subject to the relevant eligibility requirements, certain depreciating assets costing $300 or less can qualify for an immediate deduction when used mainly to produce non-business assessable income such as rental income.

For jointly held assets, the $300 threshold can apply to the cost of each investor’s interest in the asset. This means an asset costing more than $300 overall could potentially qualify for an immediate deduction for one or more co-owners.

For example, assume two tenants in common purchase an eligible new appliance for $800 and their interests reflect their property ownership:

Subject to all other eligibility conditions being met, Sam’s $240 interest may qualify for an immediate deduction because it does not exceed $300. Alex’s $560 interest does not satisfy the $300 cost test and would instead be dealt with under the applicable depreciation rules.

This is why the total purchase price alone does not determine whether a co-owner’s interest qualifies for the immediate deduction. The immediate deduction also has other conditions. Among them, the asset cannot be part of a set costing more than $300 or one of a number of identical or substantially identical assets acquired in the income year that together cost more than $300.

For co-owned plant and equipment assets, low-value pooling eligibility can depend on the value of each owner’s interest in the asset, rather than the value of the entire asset.

For jointly held assets, the relevant amount can be the cost or opening adjustable value of the individual owner’s interest in the asset.

If that interest is less than $1,000, the owner may be able to allocate it to their low-value pool, subject to the applicable rules.

As a result, co-owners can receive different depreciation treatment for the same asset. For example, if an eligible depreciating asset costs $2,000 and is owned 70:30, the interests would be $1,400 and $600 respectively. Depending on the circumstances and other eligibility requirements, the 30 per cent owner’s $600 interest may meet the cost threshold for a low-cost asset, while the 70 per cent owner’s $1,400 interest would not.

Correctly identifying each owner’s interest is therefore critical when determining low-value pool eligibility.

A tax depreciation schedule should do more than calculate one total deduction for the property.

When BMT Tax Depreciation prepares a schedule for a co-owned investment property, the ownership details can be incorporated so the available deductions are presented appropriately for each investors and their accountant.

A detailed schedule identifies qualifying capital works and plant and equipment assets, applies the relevant depreciation rules and provides the information required to determine deductions over the property’s depreciable life.

A physical site inspection can help identify information that may not be clear from purchase documents, including previous renovations, structural improvements and individual depreciating assets. Specialist quantity surveyors are recognised by the ATO as appropriately qualified to estimate construction costs where those costs cannot be established. This helps ensure deductions are based on reliable construction estimates rather than assumptions.

A co-owned investment properties can create errors where ownership percentages or individual asset interests are not recorded correctly. Common mistakes can include:

These errors can leave legitimate deductions unclaimed or result in claims that do not reflect the investor’s entitlement.

Co-owning an investment property does not remove the ability to claim depreciation, but it can change how those deductions are calculated and allocated.

Each owner’s legal interest needs to be considered, and plant and equipment assets may be treated differently depending on the value of each owner’s interest. This can affect immediate deductions and low-value pooling. Assuming that every depreciation figure can simply be divided equally risks producing the wrong result.

A BMT Tax Depreciation Schedule can account for multiple owners, identify eligible capital works and plant and equipment deductions and provide each investor with the information needed to support an accurate claim.

For a co-owned investment property, getting the ownership details and depreciation treatment right from the outset protects valuable deductions while maintaining compliance.

To understand how depreciation may apply to your share of a co-owned investment property, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote online today.