The COVID-19 pandemic has forced many businesses to reflect on “industry norms” and the way they operate. We are no exception.
At Washington Brown we believe in researching each property and advising clients on the best way to approach achieving the maximum depreciation in the most cost-effective way.
Not EVERY property needs to be inspected in order for the maximum claim to be achieved.
This USED to be the case – but the tax legislation recently changed and property investors can no longer claim depreciation on items like ovens or dishwashers that are not brand new.
So NOW you can only claim depreciation on the structure of the building like concrete and bricks for 2nd hand properties.
If you BUY brand new items like carpet and blinds, you can still claim depreciation but it must be based upon the purchase price (not an estimate).
In the OLD days, we used to visit the property so we can value these items individually, the ATO put a stop to that.
Our Commitment to Property Investors Moving Forward
If we determine that an inspection is NOT required to ensure the maximum depreciation claim – this will reduce our fee AND you’ll receive the report sooner. Let Washington Brown work out the best depreciation plan for your property here.
Here are 5 reasons why SOME properties do not require an inspection:
Extensive Database – In 40 years we have amassed an extensive database of construction costs for the majority of residential and commercial buildings around Australia.
We have the costs – We are familiar with your building and as such, we already have the construction costs on file.
Plant & Equipment no more – You have purchased a second-hand property so you cannot claim on the existing plant and equipment components.
Online data – There is an abundance of detailed information and pictures of your specific property available online (both publicly and via subscription-based industry databases).
You have the costs – Your property is a brand new build and you have access to the construction cost, plans and inclusions list.
Here are 5 reasons why SOME properties STILL NEED an inspection:
Your property is unique – Your property is classed as High Spec/Luxury/Non-Standard and therefore not typical. An inspection will ensure the maximum deductions by ensuing all facets of your property are assessed and included.
Non-residential – This means you can still claim the full benefits of depreciation including the Plant & Equipment (carpets, blinds, etc.)
Renovated – Your property has been substantially renovated. There is insufficient information online and as such an inspection is necessary to maximise the depreciation.
More information required – We do not have access to sufficient information specific to your property. We, therefore, need to acquire this via an onsite assessment.
Plant & Equipment – Your property qualifies to claim Plant & Equipment deductions, an inspection ensures no assets are missed, which means your deductions are maximised.
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:
a brand-new property;
a property built between 1987 and 2016; and
a property built before 1987.
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.
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?
In a brand-new property, the depreciation in year one is $15,000;
For the property built between 1987 and 2016, it’s $4,000 because all you claim there is the structure of the building; and
For a property built before 1987, the depreciation is $0.
Depreciation on a brand-new property
You can see that the total tax loss on the brand-new property is quite high at $22,850. If you are an investor who is paying tax at a marginal tax rate of 37.5 per cent and you’re making a loss of $22,850, you will receive a tax cheque back from the ATO to the tune of $8,455 – and that’s cash in hand. However, you have physically paid out $7,850, remember? You’ve been paying $605 a year to own that property – so the net return is $12 a week positive cash flow.
Depreciation on an old property
Next, let’s look at the property built before 1987. Again, you have physically paid out $7,850 over the year to hold the property. You can’t claim any depreciation on your investment, so the total tax loss continues to be $7,850. If you are in the 37 per cent income tax bracket, there will be a tax return of $2,905. Given that $7,850 has been paid out and there’s a tax cheque of $2,905, it’s cost you roughly $5,000 per year to own. That’s just under $100 per week 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 property built between 1987 and 2017, your annual tax loss would be $11,850, so you would receive a tax refund of $4,385 (providing you are in the 37 per cent bracket). Your cash outlay was $7,850, so your annual cash outlay is $3,465. That means your weekly cash flow is negative $66, but you’ll still eventually realise a capital gain over the medium to long term. As you can see, there are pros and cons of buying brand-new and almost-new properties, depending on your investment strategy. Furthermore, buying brand-new property often carries the developer’s profit, which you pay for in the purchase price. If you buy something ‘newish’ – say a five to ten-year-old property – there is a fair chance that it has been bought and resold a few times. Therefore the value is now reflected in a more realistic way on the open market.
An investor recently asked me, ‘Should I buy an investment property in my own name, my company name or via my super fund to maximise depreciation?’
While the tax implications are a very important part of your property investment strategy, I would never make taxation the number one reason for determining how I structure my investments.
There are many other reasons people make property investment decisions, such as for security reasons or to minimise land tax. In answering the question, I explained the basic premise that depreciation of property reduces the taxable income of the entity that holds the property. So the tax rate for that entity, when the rent is included in the equation, decides the depreciation benefit you gain.
Let me illustrate this with these scenarios:
Buying property through your SMSF
Super fund name: Washington Brown Super Fund
Washington Brown Super Fund is a complying superannuation fund and therefore its earnings are taxed at 15 per cent.
Assuming the depreciation report calculates depreciation in Year 1 at $10,000, then the maximum tax benefit to the fund is $10,000 × 15 per cent = $1,500.
The 2017 Budget will treat SMSFs the same way as individuals in the future, i.e. they will no longer be able to claim depreciation on previously used assets, only on the building allowance for second-hand residential property.
Buying property in your own name as an individual
Personal name: Tyron Hyde
For the purposes of this example, I am on the highest marginal tax rate and I pay tax at 45 per cent.
Assuming the depreciation report calculates depreciation in Year 1 at $10,000, the maximum tax benefit to me is $10,000 × 45 per cent = $4,500.
Buying property through a family trust
Property trust name: Washington Brown Trust Fund
A trust is not taxed on its earnings, but rather when it pays a distribution. Those who receive the distribution are taxed at their own marginal rates.
So, assuming a depreciation report calculates depreciation in Year 1 at $10,000, the maximum tax benefit to the trust is $10,000 × 0 per cent = $0.
After the 2017 Budget, discretionary and family trusts will be treated the same way as individuals in the future, i.e. they will no longer be able to claim depreciation on previously used assets. They will only be able to claim on the building allowance for second-hand residential property.
Buying through a company
Company name: Washington Brown Pty Ltd
The company tax rate varies from 28.5 per cent to 30 per cent, depending on the size of the business, but let’s assume 30 per cent for ease of calculation. The depreciation report calculates depreciation in Year 1 at $10,000, therefore, the maximum tax benefit is $10,000 × 30 per cent = $3,000.
But wait, there’s more…
In the scenario above, where the trust fund is the holding entity, I have assumed the property is the only asset held in the trust. If the only income the trust receives is the rent on that property, then the depreciation benefit is nil.
However, more often than not, a trust has other investments and may receive distributions that make depreciation beneficial.
If the property is in a trust and it is negatively geared, then the depreciation will increase those losses. But losses in a trust cannot be distributed and therefore are quarantined in the trust until those losses can be offset by other revenue.
In our examples, the super fund receives the lowest amount of depreciation deductions (if you exclude the trust) so you could argue that it is not the best structure. However, all earnings in the SMSF are taxed at the maximum rate of 15 per cent, and when the fund is in pension mode, the earnings and capital gains can be tax-free, which can be compelling reasons to structure your investment in this way.
Each individual investor must look at their own set of circumstances before deciding in what name to purchase a property. Taxation is one consideration and depreciation allowances are one part of the taxation puzzle. An in-depth review of taxation on property investments is beyond the scope of this book. Personally, I have purchased property in my own name, my super fund and in a trust – all for varying reasons.
I always seek financial advice from my accountant or financial adviser before entering a contract and you should too. That way I know the entity that ends up holding the asset is the right one from the beginning. Changing the structure of your investments can be a difficult and costly exercise.
The 2017 Budget outlined that companies are exempt from the budget changes, which will make companies more attractive as a vehicle to acquire property in certain circumstances.
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.
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.
Well, the dust has finally settled on the new legislation regarding the Budget changes to depreciation that will apply to second-hand residential properties.
In this article we will dig deep into some of the questions we have commonly been asked since the 9th of May 2017, when the changes were announced in the Federal Budget.
Before we get into the nitty gritty let’s begin with a quick recap:
Property investors who acquire a second-hand residential property after May 10, 2017, that contain “previously used” depreciating assets, will no longer be able to claim depreciation on those assets. Depreciating assets, in this case, refers to things like ovens, dishwashers, blinds, etc.
As you already know, in 2017, the rule book on depreciation changed massively.
The Federal Government successfully voted on new legislation to change the way depreciation works, representing the biggest move in the industry that I’ve ever seen – and I’ve been a quantity surveyor for over 25 years!
The changes were effective as at 9 May 2017 at 7.30pm, when the federal budget was handed down. As you can imagine, they have huge implications for property investors and more importantly, the property equation, which we’ll go into later.
So, how have things changed exactly?
The best way to understand it is to break the changes down into nine simple key points:
1. If you acquire a second-hand residential property from 10 May 2017, which contains ‘previously used’ depreciating assets, you will no longer be able to claim depreciation on those assets. This refers to the plant and equipment portion of a depreciation schedule, including:
• Lounge suites
• Common property plant and equipment items.
2. However, the building allowance, or claims on the structure of the building, has not changed at all. You will still need a depreciation schedule to calculate these deductions, which typically accounts for 85 per cent of the overall construction cost. The structure includes things like brickwork and concrete so there’s no change to that.
3. Acquirers of brand-new property will carry on claiming depreciation in exactly the same way as they have done so to-date – for both plant and equipment and structure. This is great news for the property industry, because a lot of developers rely on depreciation as part of their marketing strategy to attract investors. The government resisted making changes to depreciation on brand-new property because it did not want to halt construction, which would have impacted upon the supply of new property. A downturn in the construction industry would also have a knock-on effect – if tradies are out of work, they aren’t paying tax!
4. If you renovate a house while living in it, then sell the property to an investor, the assets will be deemed to have been previously used and the new owner cannot claim depreciation on the plant and equipment.
5. The proposed changes do not apply if you buy the property in a corporate tax entity, super fund (note self-managed super funds do not apply here) or a large unit trust. In other words, you can still buy a second-hand property in a company name and claim depreciation on it. You can buy a second-hand property in a super fund – as long as it’s a large one – and a large trust can buy a property as long as it has 300 members
or more, and claim depreciation on that property.
6. The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected, so you can still buy a second-hand office or similar and continue to claim the second-hand carpet, exactly as you could before. You can’t do this for residential property, as I’ve explained above.
7. If you engage a builder to build a brand-new house, or do the work yourself and it remains an investment property, you will still be able to claim depreciation on both the structure and the plant and equipment items. This is because it’s brand new, and was brand new when you put in that oven. Therefore, you can still claim it because the costs are known.
8. If you engage a builder to renovate a property – or you do the work yourself – and it is also being used as an investment property, you will still be able to claim depreciation on it when you have finished the renovations. As above, this is because the assets you install are brand new, therefore you can still claim. But if you bought a property renovated by someone else and they lived in it for six months or a year and then sold it – you can’t claim depreciation on the oven and dishwasher, etc. in the future, because they have now been previously used. See the difference?
9. While investors purchasing second-hand property can now no longer claim depreciation on the existing plant and equipment, they will have the benefit of paying less capital gains tax when they sell the property. How? Well, when they replace or remove an item of plant & equipment they would have been able to claim in depreciation under the previous legislation, the opening value of the asset can be claimed as a capital loss.
In my opinion, it seems like a lot of work to get the same result. The new rules have just moved depreciation from one line of the budget to another!
The good news is that the new legislation is ‘grandfathered’. That means that for everyone out there with an existing depreciation schedule, you can continue to claim exactly as you have been doing. So, if you bought a property prior to the budget – 9 May 2017 – nothing has changed. And if you have bought an investment prior to this date, and you don’t have a depreciation schedule, there’s never been a better time to get one! You might not get these allowances again.
One final point on grandfathering; if you bought a property prior to the budget and it is owner-occupied, and then you move out after 1 July 2017 – you will not be able to claim depreciation on the plant and equipment in that property.
Those items will be deemed to be previously used and caught in the net of the changing legislation – even though you acquired the property prior to the budget. So, these changes are kind of ‘half grandfathered’ if you ask me.
You will, however, still be able to claim the building allowance in this scenario if the property was built after 1987.
So let’s start with some of the easy questions we’ve been asked.
1. Do these new rules apply to brand new investment properties as well?
No, they don’t, if you buy a brand new property you will be able to carry on claim claiming depreciation exactly the way you have done so to date. That means you can claim both the plant & equipment and structure of the building. That is unless you live in the property as an owner occupier at any time after its completion, this would then mean the plant and equipment assets are deemed ‘previously used’.
3. Can I still claim depreciation on things like the bricks, concrete & windows etc?
Yes you can, provided the residential property was built after 1987 when the building allowance kicked in.
You will still need a depreciation schedule to calculate these deductions. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
4. Can I still claim depreciation on plant and equipment items if I buy them and have them installed?
Yes, you can, provided they are brand new or from 2nds World or the like.
However, if you buy a second-hand item off Gumtree, for instance, you cannot claim the depreciation.
There is now no other depreciable asset class where this occurs.
The new laws state that the item cannot be “previously used” in order for you to claim the depreciation on it.
However, if you buy a “previously used” lounge off Gumtree and put it in your office – you can claim it.
6. What if I bought a property prior to the budget and lived in the property until now – can I claim the depreciation?
If you bought a property prior to the budget and it is owner-occupied, and then you move out after 1 July 2017 – you will not be able to claim depreciation on the plant and equipment in that property.
The property needed to be income producing in the 2016/17 financial year.
Those items will be deemed to be previously used and caught in the net of the new legislation – even though you acquired the property prior to the budget. So, these changes are kind of ‘half-grandfathered’, if you ask me. If you did buy an investment property prior to the budget, I would recommend getting a depreciation quote now, more then ever.
7. What happens If I inherit a property – can I claim the depreciation on the plant and equipment as well as the building?
Well, you will certainly be able to claim the depreciation on the residential structure of the building, provided it’s built after 1987. So there’s no change there – and this covers most properties.
Whilst there is no specific ruling on the plant and equipment it seems to me that if you inherit a property with plant and equipment items contained within, they will be deemed to be “previously used” and you won’t be able to claim them.
This would, in my opinion, even occur if the person that you inherited the property from, bought the property brand new.
As I mentioned, there is little guidance on this topic so it might be best to check this with the ATO if this question is relevant to you.
9. Can I still claim depreciation on a property that I bought overseas?
The answer is yes, you can depreciate an overseas investment property… but there are a few key differences.
The first main difference is with regard to claiming the building allowance. With Australian properties, you’re entitled to claim 2.5 per-cent of these construction costs per annum, as long as the property was built after July 1985. The rate for overseas properties is the same – but the date is different.
Construction of an overseas property must have commenced after 22 August 1990.
So, if you want to maximise your depreciation benefits on an overseas property, look for a newer property built in the last decade or two.
The plant and equipment, such as carpets, ovens, lights, and blinds, can also be depreciated as they would be in an Australian investment property but now they will have to be brand new or not previously used.
10. What happens if I engage a builder to renovate my investment property can I still claim depreciation?
In simple terms yes – provided all the plant & equipment items that were installed were brand new. You will also be able to claim all the structural items installed such as kitchen cupboards, tiling windows etc.
12. Show me the numbers?! How much will these changes actually mean in terms of how much depreciation I will be able to claim moving forward?
Well in order to understand this – it’s best to examine 3 different scenarios:
An investor buys a brand new unit or house for $850,000.
As you can see from the above chart the depreciation amount you can claim if you bought the same property pre-budget or post-budget hasn’t changed.
That’s because a brand new property is exempt from these changes.
An investor buys a residential house or unit for $850,000 that was built in the year 2000.
As you can see from the above the depreciation allowances available have dramatically reduced in the early years now.
Towards about year 8 they level out and aren’t that different. This is because the pre-budget chart on the left-hand side still shows that you can claim the plant and equipment. Whereas the chart on the right-hand side shows how you can only claim the building allowance moving forward.
The key takeaway from this is: That the depreciation allowances on second-hand property built after 1987 are affected most in the first 5 years. After that – there’s not much difference.
An investor buys a residential house or unit for $850,000 that was built prior to 1987 – that hasn’t been renovated.
Well in this scenario it’s all or nothing! Pre-budget we, as quantity surveyors, would visit a property, regardless of its age, and re-value the plant and equipment items like carpet, oven etc. In essence, starting the depreciation process again.
The Government wanted to stop this continual revaluation of plant & equipment and this will be achieved by the new legislation.
As you can see from the chart above if you buy a property that was built prior to 1987, there will be no claim at all if the property is still in its original state.
Why? Well, the plant & equipment will be deemed as previously used, thus no claim applies and in order to claim the building allowance, the property has to be built after 1987.
However, this is very rare, as most properties built prior to 1987 have had some renovation to them, whether that be a new bathroom or kitchen and those costs are claimable.
13. Can I still claim depreciation on plant and equipment on my holiday home if I use it twice a year?
This is the biggest grey area of all the legislative changes in my view and one that will require further clarification moving forward.
The Government in the Housing Tax Bill Explanatory Memorandum states that if a property is used in an “incidental way” or “occasionally used” then your depreciation eligibility on the Plant & Equipment does not stop if you acquired the plant & equipment prior to The Budget in May 2017.
Incidental Use is described as:
“Use is incidental if it is minor in the context of the overall use and arises in connection with another non-incidental use – for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use.”
Occasionally Used is described as:
“Spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.“
It’s a bit vague, isn’t it?
Does one week a year over Christmas nullify your claim? What about if you stay for Easter and Christmas?
What does this mean for all the Airbnb landlords out there that claim depreciation but move in when times are quiet but acquired the property prior to the budget? They went into that investment doing the maths on being able to claim the depreciation on a pro-rata basis based on the tax laws at the time?
Now if they use the apartment for an unknown time they may be disallowed the depreciation deduction.
Strangely, this Memorandum, differs from the ATO’s website which was updated on the 15th of December 2017 which indicates that “Gail and Craig” who use their property for 4 weeks a year can claim the depreciation? “Kelly and Dean” would appear to be ok as well!
Whilst the Memorandum doesn’t give a time frame… it indicates that a weekend is OK…I would’ve thought 4 weeks would’ve been stretching it?! Who knows – pick a number????
This is at a time when the ATO wants to target Airbnb hosts and pro-rata any capital gain tax exemption that may be applicable.
Hopefully, sense will prevail and if the holiday home is clearly available for rent – like 11 months over the year – it’s still an investment property.
Dealing with your rental property post-budget change
Before the budget change investors were entitled to claim plant and equipment and building allowance, so long as the property was built post-1987 and the property had settled within 10 years of getting the depreciation report, even if they had lived in the property prior, post or during the purchasing of their depreciation report.
A common question regarding the budget change:
The other day I received an email from one of my clients asking me for some personalised advice regarding his investment property and depreciation report. He told me he and his wife had purchased their first home in 2011. It was not a brand new property, and between 2014-2016 they rented out the property with a full depreciation schedule, claiming all they were entitled to. At the start of 2016 they moved back in to their home, and are now looking to renting it out again.
He was wondering if they are still eligible to claim the original tax depreciation schedule they purchased in 2014, or do they have to adhere to the new government tax depreciation rules since the budget change concerning the plant and equipment on established properties.
I thought this was a great question, and wanted to ensure all of my clients and readers were aware of the significant changes to the way second-hand, previously used assets are now being treated moving forward from the budget change.
The changes outlined:
As of the Federal Budget Announcement on the 9th May 2017, the Government has disallowed depreciation deductions on items such as Ovens, Dishwasher etc. where they have been previously used.
Whilst these new laws are grandfathered and as such are only applicable to properties purchased after the May 9th announcement, one caveat exists: The property must be income-generating at some point between July 1st, 2016 and June 30th, 2017.
This meant, that even though my client had acquired the property before the budget, they were unfortunately ‘caught in the net’ because they were living in their property for the entirety of the 2016/2017 financial year. Due to this, those aforementioned items would now be considered ‘previously used’ and they wouldn’t be entitled to claim any further depreciation on them.
The explanatory memorandum issued by the Government is a bit ambiguous (if you ask me):
“The amendments also apply to assets acquired before this time if the assets were first used or installed ready for use by an entity during or prior to the income year in which this measure was publicly announced (generally the 2016-17 income year), but the asset was not used at all for a taxable purpose in that income year. “
It’s worth noting that these new rules only apply to residential properties. Commercial, industrial and other non-residential property are not included.
It’s also important to note that the way residential property investors claim depreciation on the building has not been altered. You can continue to claim the depreciation on the structure (all the bricks, concrete etc.) provided the building was built after 1987.
If you’re looking to invest in real estate, commercial properties present plenty of opportunities. However, you need to consider the risks and market drivers. This commercial property investment guide will help you.
You must think about more than the property investment basics when investing in commercial real estate. There are many complex market issues at work, which means you take on more risk.
Understanding these issues will play a role in the success of your investment in real estate. Commercial properties come in all shapes and sizes, which you must account for. This commercial property guide will equip you with the tools you need to succeed.
The Market Drivers
Several drivers affect the state of the commercial real estate market. You must understand what these drivers are before you can invest successfully. They include the following:
The strength of the economy. A weak economy means there are fewer businesses available to lease your property. Keep an eye on the data. For example, transport sector growth indicates that an economy is getting stronger.
Infrastructural improvements influence businesses’ decisions. For example, the building of new roads usually results in an influx of companies to an area. Buy your commercial property with future developments in mind.
The Reserve Bank of Australia’s (RBA) interest rates have an effect. If interest rates are on the rise, you’ll find less success with your commercial property. The cost of money increases. This places your potential tenants under greater financial strain. Conversely, low interest rates lead to more demand.
Population growth in certain regions will affect your decisions in real estate. Commercial properties do well in areas with large populations. This is because the demand for services increases, which leads to an influx of businesses into the area.
You should also consider population demographics. For example, areas with a lot of retirees will have more need for medical services. However, areas with lots of children need more family-oriented services. Use population demographics to find out about the types of businesses that will express an interest in your property.
There are also several risk factors to consider when you invest in commercial property. Here are some of the most important:
Commercial properties tend to stand vacant for longer than residential properties. You will have to handle the costs of the property during such periods. As a result, it’s usually best to tie commercial tenants to long-term leases.
New property construction always presents a risk to your investment. Your tenants may decide to explore their options, which could lead to vacancies. It’s the issue of supply and demand. The more supply, the harder it is to find tenants. You also won’t be able to charge your tenants as much when there are other options available.
Size is an issue. Large commercial plots cost a lot more to maintain, and are only suitable for certain types of business. Smaller plots may be cheaper, but they also have their limits. You must consider the local demand for services before deciding on the size of your commercial investment.
Infrastructural improvements in other areas represent risks for your established commercial properties. Your tenants may make the move to the new area, which means you lose out. As a general rule, try to invest in properties that are close to central business districts (CBDs).
A poorly-constructed lease could lead to the failure of your commercial investment. These are the factors to consider when creating your leases:
Commercial leases can extend from three years up to 10. The longer the lease, the less risk of vacancy. However, a bad tenant on a long-term lease could cost you. Offer the option to renew if you’re confident in the tenant’s ability to make on-time payments.
Link your rent increases to the Consumer Price Index (CPI).
You may require council approval for some types of business. For example, chemical treatment plants need to have the correct documentation.
Insert a condition that compels the tenants to revert the property to its original condition upon leaving. This will make it easier for you to rent the property out again when you current tenant departs.
What Else Should You Consider?
Further to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.
You’ll also deal with a commercial agent, rather than a real estate agent. These professionals specialise in attracting the right businesses to your property. They’ll also help you to create attractive deals for potential tenants.
The Final Word
As you can see, commercial investment is a complex subject. This commercial property guide will equip you with the tools you need to succeed.
The team at Washington Brown can also help you to claim depreciation on your commercial property. Contact us today to speak to a Quantity Surveyor.
Cashflow can become a major problem with your property investment. For beginners, slow cashflow could prevent you from building your portfolio as quickly as you’d like. Happily, there are some tricks you can use to make improvements to your investment property cashflow.
So, you’ve got what you think is a great investment property. You’ve followed all the property investment basics, but your cashflow is tighter than you expected. At times, it can be a real struggle to pull together the money to pay for the property’s expenses.
This is a common problem, no matter how well you’ve followed investment property tips. Beginners, in particular, tend to struggle with getting their cashflow up to the level they’d hoped for.
All is not lost. There are a few tips you can follow to improve your investment property cashflow.
Tip #1 – Raise the Rent
It may seem like a simple tip, but it’s one that many beginners don’t think about when they’re dealing with cashflow issues. Raising the rent on your property can offer a short-term solution while you look at the bigger problems.
Of course, you can’t do this every time you face a cashflow issue. Constant rent increases will drive your tenants away. However, it becomes an option if you haven’t re-examined your rents for some time. In such cases, you may be charging less than other investors in the area.
You must also remember your tenancy agreement, along with the laws of your state. Either may prevent you from raising your rents. That’s why many investors wait until the end of a tenant’s lease period before increasing the rent. With some luck, you can secure the tenant on a longer fixed lease at the new rate.
Tip #2 – Take a Look at Your Home Loan
Do you still have the same home loan you applied for when you bought your investment property? Australia has dozens of lenders who offer hundreds of mortgage products between them. Take advantage of that fact to secure a better home loan.
Work with a mortgage broker to find out what other products are out there. You may find that switching your loan gives you access to lower interest rates and some useful new features. Alternatively, you could use the information you find as leverage against your current lender. Most lenders want to keep reliable clients. If you’ve made on-time repayments, you may find that your existing lender offers a better deal when you threaten to leave.
Those are some long-term options. You could also switch your home loan to interest-only periods for a short while. This will help you to deal with more immediate cashflow concerns.
Tip #3 – Look at Other Income Streams
The property investment basics don’t always cover the other income streams your property may have to offer.
Take some time to think about how you could use your property to generate more than the rental income.
For example, you could lease the side of the building as advertising space if your property is near a busy road. Alternatively, you could lease out any unused parking spaces. Each offers a little extra income beyond your property’s rental income. Remember, that every little bit can help when you have cashflow problems.
Tip #4 – Examine Your Outgoings
Reducing costs is a crucial part of property investment. For beginners, this means taking a detailed look at your figures. You may find that you’re paying too much for your insurance. Or, you could negotiate a better deal with your property managers.
Many who encounter cashflow issues find that they’re paying too much for various services. You may also be paying for things you don’t need. For example, you could handle some basic maintenance issues yourself, rather than hiring somebody to do it for you.
Again, this frees up small amounts of cash. Nevertheless, you’ll improve your cashflow with each positive change to your outgoings.
Tip #5 – Get on Top of Depreciation
It’s amazing to think about how many new investors don’t think about rental property depreciation rates. They don’t investigate the claims they could make on their assets. Instead, they keep plugging away without a depreciation report. Alternatively, they assume their accountants have factored depreciation into their tax returns.
You need a depreciation schedule. If you don’t have one, you’re cheating yourself out of thousands of dollars.
Hire a quality Quantity Surveyor to draft a full depreciation schedule. Your surveyor will ensure you claim the maximum amount over the lifetime of each asset. Furthermore, you’ll learn more about tax compliance in your state.
Your Next Step
You’ll make both short and long-term improvements to your cashflow if you follow these tips. You can handle the first four with the help of an accountant and mortgage broker. However, you need additional help to create a depreciation schedule.
Washington Brown has the answer. Speak to one of our Quantity Surveyors today to get a quote.
An investment property tax deductions calculator won’t always show you everything you can claim. Many leave out the assets that go into a typical depreciation schedule. Here are the things that your tax depreciation schedule must contain.
When it comes to tax, there’s one question you must ask about your investment property: what can I claim?
There are the basics of course. Everybody looks into mortgage tax deduction. Australia is full of financial experts who can help with this issue. You may even find that an investment property tax deductions calculator can do the basics for you.
But what about property depreciation? It’s a type of deduction many investors miss, but it could save you thousands of dollars every year. Others make claims, but do so using the wrong schedule. Again, they end up missing out on thousands of dollars in savings.
You need to call in the experts. No, that doesn’t mean your accountant. Instead, a Quantity Surveyor is the professional you need to create a strong depreciation schedule.
The typical schedule will include the depreciation of capital works and equipment. However, some leave out other, less obvious, assets. Here’s what your depreciation schedule must contain if you’re to maximise your deductions.
You may have chosen a unit or apartment as your first investment property. Australia has several cities, which can make such properties a wise investment choice.
Naturally, you’ll claim depreciation on your unit’s assets. But what about the assets that it shares with other units in the apartment complex? You can claim for your portion of those too, but many investors miss out on these deductions.
Common items include fire extinguishers, air conditioning units, and lifts. You can also claim for ventilation and hot water systems. You don’t get to claim depreciation on the full value of the asset, but even a little bit can help with your cashflow.
Item #2 – Scrapped Items
Let’s assume you’ve carried out some renovations on your property. Oftentimes, you’ll have a bunch of assets left over that you no longer have a use for. Many just throw such items away, without giving them a second thought.
That’s a mistake. Old items have what’s known as a scrapping, or residual, value. This is the item’s value once it’s reached the end of its use.
You can claim a final depreciation sum on any items you intend to throw away following renovations. Such items include old appliances or carpets. Have a Quantity Surveyor create a new depreciation schedule prior to your renovations. This will ensure you catch any assets with scrapping value.
Item #3 – Common Outdoor Items
Let’s come back to shared items. It’s not just the common indoor items you can claim depreciation on. Any common items outside the apartment block itself have value to you as well.
This includes pathways, fences, and various landscaping items, such as pergolas. You may even be able to make claims on a shared swimming pool.
However, you can’t claim for all common outdoor items. For example, turf and plants won’t find their way into your depreciation schedule.
Item #4 – The Fees You Pay to Design Professionals
Did you realise that you can include the fees you pay to design and construction professionals in your tax deductions? Australia offers plenty of opportunities to build your own property. Investors often go down this route, rather than buying an existing property.
Your depreciation schedule must account for the costs of such construction work. This includes the money you paid to any designers or architects who worked on the project.
Make sure you supply your Quantity Surveyor with accurate receipts for these services. This will allow you to maximise your claim for the fees you pay.
Item #5 –Money You Pay to the Council
You may have to pay fees to the council for various services. For example, there are costs involved with lodging application fees, or getting council permits.
If you’re building your own property, you may also have to spend money on infrastructure. This might include gutters and footpaths.
Your depreciation report should include all these items. Again, this is something that many investors miss out on because they don’t think the costs relate directly to their properties.
The Final Word
Check your depreciation report again. Does it include all the items on this list? If not, you’re missing out on several Australian Taxation Officer (ATO) tax incentives for homeowners.
You need the help of Washington Brown to create an accurate tax depreciation schedule. Call us today to speak to one of our Quantity Surveyors about your property.
Six Things To Know Before Buying an Investment Property:
You may be thinking about buying an investment property. Australia has a strong property market, which attracts a lot of buyers. However, there are some property investment basics to keep in mind.
The attractive Australian house market has many people investing in property. For beginners, this means learning the property investment basics that will lead them to success. After all, property isn’t a sure thing. It may offer more security than investing in stocks, but you have to put the work in to generate an income.
So what do you need to learn before you invest in a property? Here are some things you must know about property investment for beginners.
Issues #1 –How Much You Can Borrow
You need to know how much you have to spend before looking for an investment property. If you don’t, you run the risk of finding the perfect property, only to discover that you can’t afford it.
You can get a general idea for how much money you need when buying an investment property. Calculator websites allow you to enter some figures to produce a rough estimate. They’ll ask about your income, in addition to any expenses you currently incur. These include everything from your debts, through to the dog food you buy each week.
However, you won’t know for certain until you speak to a lender. Most importantly, you must find out how much of the property value you can borrow. This will tell you how much money you must raise for your deposit.
Issue #2 – Your Investment Plan
Most people approach property investment with a simple end goal. They want to make enough money from their property to quit their jobs. However, many don’t really understand what this means. Enough money for one person may not be enough for another.
So, you need to have a plan in place before you start investing. Work out how much income you need your investments to generate before you can live off the proceeds.
This is your real goal. A vague notion of early retirement won’t keep you focused. You need to know exactly what you’re shooting toward before you invest your money.
Issue #3 – The Different Types of Gearing
You may have heard of gearing, without really understanding the concept. You need to learn what gearing is to create a strong investment plan.
There are three types of gearing: positive, negative, and neutral. Positive gearing means that your property generates enough income to cover its expenses, with money left over. You have to pay tax on your income when you have a positively geared property.
Negative gearing means your property doesn’t generate enough money to cover its costs. This may sound like a bad thing. However, you can use negative gearing to your advantage. Many investors offset the losses their properties make against other income sources, such as their salaries.
As the name suggests, neutral gearing means the income covers the costs. You don’t make any profit, but you don’t lose money either.
Issue #4 – The Choice Between City and Rural
There’s a huge difference between city and rural properties. City properties give you access to more people, which makes it easier to fill vacancies. However, rural properties allow you to charge higher rents. You can also buy rural properties for less money.
So, which do you choose? It all comes down to what you want to achieve. City properties tend to enjoy higher capital growth than rural properties. However, it’s easier to positively gear a rural property.
You need to do your research before creating any property investment strategies. Australia offers all sorts of opportunities. Consider area population, local economies, as well as demand when choosing where to buy your property.
Issue #5 – Who Provides Legal Advice?
You’ll have a choice between conveyancers and solicitors when looking for legal advice. Both work in law, but they’re slightly different.
Conveyancers focus solely on property law. They’re highly specialised, but won’t be able to help you with any issues that aren’t directly related to the property. Solicitors offer well-rounded knowledge on a range of issues. However, they also cost more money.
Your choice depends on the property. If you anticipate a lot of legal issues, hire a solicitor. This usually costs between $2,000 and $3,000.
A conveyancer costs approximately $1,000. Use these professionals if you anticipate a simple transaction.
Issue #6 – Your Exit Strategy
You should achieve success with proper planning. However, that doesn’t mean that you don’t need an exit strategy.
Your exit strategy determines how you’ll generate a profit from your investment. For example, you could decide to sell after a set amount of years to take advantage of capital gains. Alternatively, your exit plan may involve benefitting from the rental yield until you retire. Upon retirement, you could move into the property, rather than sell it.
The main point is that you need to know how you’ll exit the investment. If you don’t, you can’t take full advantage of the property during your ownership period.
The Final Word
Investing in property could help you to enjoy a greater level of financial comfort. However, poor preparation will lead to mistakes and potential losses. You need to know how to maximise your investment before you commit your money to a property.
Washington Brown can help you with that. Our Quantity Surveyors can help you to calculate how much you can claim in depreciation. Get in touch today to find out more.
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