Estimating Depreciation if you Build
If you are planning on building a house, how do you estimate the potential depreciation on the construction of an investment property? Unfortunately, there isn’t a calculator on the market that can make this estimation, so we’ve done some calculations for you.
If you are thinking about engaging a builder to build your investment property, here are the percentages you can use in relation to your construction contract value.
Year 1 6%
Year 2 4.5%
Year 3 4%
Year 4 3.75%
Year 5 3.5%
What it means
If your house cost $200,000 to build, you could expect a $12,000 depreciation deduction in Year 1, and a $9,000 deduction in Year 2. etc. This guideline is best used for construction costs less then $500K. Any higher and the ratio’s are likely to decrease.
Other tips
By building yourself or having input into the building of an investment property one of the other key benefits to you is that you can maximise your depreciation through the choice of materials used. For instance, you may carpet the bedrooms instead of tiling them because carpet has a higher depreciation rate. Further, you might put in fans as opposed to air-conditioning because fans that cost less then $300 can be written off – as opposed to a Split System air-conditioning unit that needs to be written off over 10 years.
If you have questions or need further clarification on this topic please send us an email.