AIRBNB

By now you have probably heard that the Australian Taxation Office (ATO) is putting Airbnb owners ‘on notice.’

Airbnb has emailed owners warning them that their details have been shared with the ATO.

I suspect that there might be a few ‘Nervous Nellies’ out there – those who haven’t declared the income they have been receiving by letting out their property (or part thereof.)

I also suspect that if the income received hasn’t been declared then any allowable deductions will probably be missing from their tax return as well.

Remember, if you have been renting out an investment property on Airbnb, you might be entitled to claim depreciation as well.

This could equate to thousands of tax dollars saved per year and this may help offset any potential liability should the ATO come knocking.

Under the new laws, however, it does get a little tricky in cases where you rent out part of your home or stay in your holiday home several times a year.

It can still be a worthwhile exercise. If you find yourself in this situation, please give us a call for some free advice as to whether a depreciation schedule is suitable and worthwhile for you.

Is now the time? Q&A with Terry Ryder

With so much going on in the Property and Finance space currently, I thought that now would be a great time to catch up with my friend and leading property analytics researcher Terry Ryder (Owner and Creator of Hotspotting). 

I was able to speak with Terry recently to ask his opinion on investment and the current climate.  I wanted to share the content of our discussion with you all and hope you find it both interesting and insightful.

Regards,

Tyron Hyde

Terry – in your opinion is it a good time to invest in property now?

It’s time for investors to get off the fence and start taking action in real estate markets.

The revival in major city markets since May has been largely driven by owner-occupier buyers, with investors sitting on the fence and watching events unfold.

Investors exited the Sydney and Melbourne markets in droves last year as it became evident that the boom in those cities had expired.

The first half of 2019 was a perfect storm of negative factors for real estate – the lead-up to the Federal Election put a brake on decision-making, finance was hard to obtain, big city prices were trending south and media was largely pessimistic.

There’s certainly been a turnaround since then hasn’t there?

The turnaround since May has been profound. The Federal Election result led “a series of fortunate events” which unfolded in rapid succession: an easing of lending restrictions, a series of interest rate reductions, lower taxes for many Australians and a change in the tone of media coverage.

Initially, we saw an improvement in sentiment. Then, as that translated into action at street level, the real estate data started to improve. Sales activity picked up, auction clearance rates improved and price trends improved.

Terry – have you got any data to back up this improvement in sentiment?

Real estate data is now positive for most markets. Here’s what the indicators are telling us:-

Vacancy rates: Vacancies are low in most cities. Sydney is the only capital with a vacancy rate above 3%. Vacancies are much lower than last year in Brisbane, Perth, Adelaide, Darwin and Hobart. Melbourne is a little higher but still only 2%. Canberra vacancies are up but remain just 1.2%.

Rentals: Residential rents have risen in all capital cities except Sydney in the past year. Figures from Domain and SQM Research confirm the biggest growth has been in Hobart, which has the lowest vacancies. Rents are up 3-4-5% in Canberra, Adelaide and Perth, while Brisbane and Melbourne are up slightly.

Clearance rates:  Throughout August, September and October, Sydney and Melbourne have been recording auction clearance rates above 70%, compared to 45-50% a year earlier. Buyers are competing for good properties and listings are relatively low.

Prices: August and September both delivered positive price data in most cities, notably in Sydney and Melbourne. SQM’s Prices Index early in October recorded monthly price rises in Sydney, Melbourne, Brisbane, Adelaide, Canberra and Hobart. In annual terms, there’s evidence of price uplift in Brisbane, Adelaide, Canberra, Hobart and even in Darwin. Sydney and Melbourne remained down in annual terms, but only by 1-2%, much better than six months earlier. There have been strong rises in many regional markets also.

Investors drifted away from real estate in 2018 and early 2019 because it seemed the growth party was over. Now, all the evidence points to recovery.

The latest lending figures showed the first signs of investors returning to the market. I expect subsequent months to show investors coming back in greater numbers.

Thanks Terry I look forward to chatting with you more in the upcoming months.

Investing in a brand new property versus second-hand property: The Tax Depreciation perspective

It’s no secret that there are different strategies when it comes to investing in property. Some people prefer to invest in brand-new properties, while others opt for older property that they can renovate and resell for profit. Whilst depreciation should never be the reason behind an investment decision, recent legislative changes have altered which types of properties are eligible for depreciation deductions.

When announcing the Legislative Changes in 2017, the government stated that moving forward, they will “Deny income tax deductions for the decline in value of ‘previously used’ depreciating assets.”

What does this mean for investors? Let’s look at this in context. If you look at the table below, you’ll see a simplified net effect of the cost of owning an investment property broken down into three generalised scenarios:

  1.       A brand-new property;
  2.       A second-hand property built between 1987 and 2018; and
  3.       A property built before 1987.
PURCHASE PRICE

$750,000

Brand New

Property

Property Age

1987 – 2018

Property Built

Before 1987

Rent Received

@ $700 Per Week

$36,400 $36,400 $36,400
Interest @ 4% of

80% Borrowing

$24,000 $24,000 $24,000
Other Expenses

@ 1.5% (Rates, levies)

$11,250 $11,250 $11,250
Cash Surplus/Outlay Before

Depreciation

$1,150 $1,150 $1,150
Year 1 Depreciation Deduction – Building -$4,000 -$4,000 $0
Year 1 Depreciation

Deduction – Plant & Equipment

-$11,000 $0 $0
Total Taxation Position -$13,850 -$2,850 $1,150
Tax Refund @ 37% $5,125 $1,055 -$426
Net Income

(Net Outlay + Tax Refund)

$6,275 $2,205 $724
Cash income Per Week

(If a Positive Number, the Property is paying you)

$120 $42 $14

 

The assumptions are the same for each scenario: each property will generate a weekly rental income of $700 over a 52-week period, which works out at $36,400 per property.

Furthermore, the interest rate is 4 per cent for each property. Each scenario incorporates an LVR of  80 per cent of the purchase price ($750,000) – This equates to an annual interest expense of $24,000.

Each property will have other expenses – Assumed at 1.5 per cent of the purchase price, which is $11,250 annually. Granted, you could argue that property built before 1987 could have higher expenses, but for ease of comparison, we’ve kept the same rate.

So, it’s the same scenario for each property with the net outlay before depreciation of $1,150.

Now, here’s where things get interesting! What about the depreciation?

Note: Recipients of this email are entitled to a FREE estimate of the depreciation deductions available. If you own an investment property, new or second-hand, and haven’t had a depreciation schedule prepared, click here to request an estimate.   

 Depreciation on a brand-new property

You can see that the total tax loss on the brand-new property is quite high at $13,850. If you are an investor who is paying tax at a marginal tax rate of 37 per cent and you’re making a loss of $13,850, you will receive a tax cheque back from the ATO to the tune of $5,125 – and that’s cash in hand.

This amount, plus the $1,150 (Cash Surplus Before Depreciation) is $6,275. In this example, the property has been paying you $6,275 a year to own that property – so the net return is $120 a week positive cash flow.

Depreciation on an old property

Next, let’s look at the property built before 1987. Again, there is a $1,150 cash surplus before depreciation. In this example, you cannot claim depreciation on the previously used Plant and Equipment or on the original structure. So, here, you’ve actually increased your taxable income by $1,150. If you are in the 37 per cent income tax bracket, this equates to you paying an additional $426 in tax.

Given that you’ve made $1,150 and have then paid the additional $426 in tax for this, you are roughly $724 up per year. That’s around $14 per week you are making to own a property built before 1987.

Depreciation on a second-hand property built between 1987 and 2017

Using the same variables, if you bought a second-hand property built between 1987 and 2018, your annual tax loss would be $2,850, so you would receive a tax refund of $1,055 (providing you are in the 37 per cent bracket). Your cash surplus before depreciation was $1,150, so your annual surplus for owning the property is $2,205. That means your weekly cash flow a positive $42.

As you can see, from a depreciation perspective, there are pros and cons of buying brand-new vs older or almost-new properties. Again, whilst a property’s likely depreciation deductions shouldnt be the main reason for a purchase decision, depreciation certainly has a significant impact on an investor’s cashflow equation. 

Remember: To receive a FREE estimate of the likely deductions available to you on your investment property, whether new or old, click here!

How the depreciation changes affect buying brand new property versus second hand property.

The recent depreciation changes have the greatest impact on the types of property you may choose to invest in. Some people prefer to invest in brand-new properties, while others opt for older property that they can renovate and resell for profit. So, which is the better investment strategy? Let’s look at this in actual finite details. If you look at Table 5.1 below, you’ll see the net effect of the cost of owning a property broken down into three examples:

At the time of writing this book in 2017, the middle column is 2016 because it’s one year prior to the current year. This highlights that the property is second-hand and you will be acquiring previously used assets if you purchase it now. If you’re reading this in 2019, the middle column will be 1987 to 2018; one year less than the current year.

Depreciation on three types of residential investment property

The assumptions are the same for every property: each one will generate a weekly rental income of $700 over a 52-week period, which works out at $36,000 per property. Furthermore, the interest rate is 5.5 per cent on each property on borrowings of 80 per cent of the purchase price – that’s an annual interest bill of $33,000 which is the same to illustrate the net effect on depreciation. Each property will have other expenses at 1.5 per cent of the purchase price, which makes $11,250 annually for each property. Now, you could argue that property built before 1987 could have higher expenses, but for ease of comparison we’ve kept the same rate. So, it’s the same scenario for each property with the net outlay before depreciation of $7,850. Now, here’s where things get interesting, what about the depreciation?

Depreciation on a brand-new property

Depreciation on an old property

Depreciation on a second-hand property built between 1987 and 2017

How the new depreciation laws affect depreciation on old property

There is a common misconception in the property market that you cannot claim depreciation on old properties. This is wrong, and I can prove it!

The origin of this myth centres on the fact that you cannot claim building depreciation on residential properties where the construction commencement date is before 1987.

This is a true statement and put simply means that you can’t claim depreciation on the structure of the building – the brickwork and concrete – if it was built before 1987.

But here’s the rest of the story. While it is true that the government has disallowed claiming depreciation on previously used assets, all properties built after 1987 will still qualify for the building allowance – making it worthwhile to order a depreciation schedule.

Further, it is pretty rare these days that when we inspect a property built before 1987, there hasn’t been some form of kitchen or bathroom renovation carried out – and the renovation resets the start for those works and thus can be claimed by the incoming property investor.

The best way to test how much you can claim on an old property is to use the Washington Brown depreciation calculator. Here you can crunch the numbers on your property and see how much you can claim. All you need to do is answer some simple questions about the property in question.

This calculator has now been updated to reflect the changes announced in the 2017 Budget.

Try Washington Brown’s proprietary Property Depreciation Calculator

This is the first calculator to draw on real properties to determine an accurate estimate. It allows you to work out the likely tax depreciation deduction on your investment property.

https://www.washingtonbrown.com.au/depreciation/calculator/

This is the only calculator in Australia that enables you to enter a purchase price and get a depreciation estimate as a result. It took me four years to build, because it relies on real life data and is very complicated to say the least.