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.
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?
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.
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.
When trying to figure out how to invest in property with little money, many new investors look toward discounted properties. However, there are some risks you must keep in mind.
Foreclosure is an ever-present risk for Australian homeowners. Failure to meet your mortgage repayments could result in your lender taking possession of your property. It’s an issue that affects thousands of people every year. In Victoria alone, almost 1,000 people had their homes repossessed between 2014 and 2015.
Foreclosed, or discounted, properties present an opportunity for property investment for beginners. In fact, many make discounted homes their first investment property in Australia.
However, buying a foreclosed home is not always simple. Here are six things you must watch out for when purchasing a discounted property.
Issue #1 – Your Own Finances
When a lender forecloses on a property, they take ownership of it. As a result, you buy discounted properties directly from the previous owner’s lender.
What does this mean for you? For one, you can expect the lender to want to get the transaction over with as quickly as possible. You’ll have to deal with a shorter settlement period, and the lender will want to see that you have your finances in order. Furthermore, having pre-approval on a home loan isn’t always enough. You need to have more concrete evidence that you have the money to spend.
Make sure your finances are in order before trying to buy a discounted investment property in Australia.
Issue #2 –The Quick Settlement
As mentioned, you’ll deal with a quick settlement period when buying a discounted investment property in Australia. This is because the lender needs to get the property into somebody else’s hands. The longer that takes, the more time the lender has to wait before recouping their costs.
Prepare yourself for this ahead of time. Make sure you have a solicitor in place who will prioritise the transaction’s paperwork for you. Furthermore, work closely with your own lender to ensure nothing can go wrong with your mortgage application.
Failure to meet the conditions of the settlement could lead to you paying penalty fees. Suddenly, your discounted property costs more than you expected.
Issue #3 – The Need to Make Repairs
Foreclosures are not pleasant situations. The previous owners will have vacated the property quickly. They will also have been going through some financial difficulties. As a result, maintaining the property would not have been a priority.
Expect to make repairs to several fixtures and fittings. It’s also likely that you’ll have to clean up before you can start using the house as an investment property in Australia. Worst case scenario, you’ll have to renovate extensively.
Factor this into your budgeting before you buy the property. You won’t be able to use your discounted property to generate an income if it’s in a state of disrepair.
Issue #4 – The Effects of Unruly Previous Owners
Those undergoing foreclosure will feel a lot of stress. After all, they’re facing financial issues and the prospect of losing their home.
In some cases, the previous owner may have lashed out against the property itself. There are reports of investors buying discounted properties, only to find extensive damage. You become responsible for fixing this damage as soon as you take ownership of the property.
You can avoid this problem if you arrange a building inspection. Have an inspector ready to go as soon as you make contact with the lender who owns the property. This ensures that you find any deal-breaking issues before the transaction reaches settlement.
Issue #5 – The Location
Buying a discounted property doesn’t mean you should forget about the location. Checking the property’s location is one of the property investment basics.
Take some time to visit the area, so you can get a feel for the neighbourhood. Also, remember that the pictures you see aren’t fully representative of the property. The seller uses those images to make the property look as attractive as possible.
As a result, you need to visit the property yourself at least once before making your offer. If the location isn’t suitable, no discount is worth the risk.
Issue #6 – Your Research
You may forget to do your research in your rush to buy a discounted property. The faster settlement doesn’t help with this. You have a lot of pressure on your shoulders to get the deal done quickly.
Some investors use this as an excuse to research less thoroughly. Don’t fall into that trap. You need to know if the property has the potential to contribute to your portfolio.
Examine the usual data. Check to see how local property prices have fluctuated over the last few years. Have a plan in place for what you’ll do with the property once you have it. It’s also worth checking tenant demand, assuming you wish to use the property to generate a rental income.
The Final Word
Buying discounted properties could help you to make a lot of money as an investor. However, you shouldn’t go into any deal without checking all the issues.
You also need to consider how you’ll claim deductions on your new property. Washington Brown can help, so contact us today to find out how much you can claim.
Your Investment Property in Australia Doesn’t Have to be Pre-Owned
Whether you buy an old or new property is one of the key decisions you’ll have to make when buying an investment property in Australia. Both have their advantages. With an old property, you can often secure a great deal, plus there’s potential to renovate and add value. You can also feel more certain about how the property will perform
A new investment property in Australia may not come with those assurances. However, you shouldn’t discount them outright. In fact, investing in new homes comes with several benefits that may earn you more money.
Benefit #1 – Higher Capital Growth
As we all know, location is important when buying an investment property in Australia. Choose the wrong location, and you limit the capital growth your property will enjoy. Buying an old property in a desirable location practically guarantees you’ll enjoy capital growth. That’s a given.
But many don’t realise that the same applies to new properties as well. In fact, a new property may enjoy greater capital growth than an old property in the same location. Newer properties tend to enjoy higher levels of demand than old properties. Buyers and renters want the latest mod cons, which they won’t always get with an old property. This increased demand makes the location more desirable which contributes to increased capital growth for your property.
Benefit #2 – Construction Quality
Have you ever bought an old investment property in Australia, only to find that you have to spend thousands of dollars on renovations? It’s not an uncommon problem. Properties wear out over time. Fixtures need replacing and appliances need maintenance. This is all money coming out of your pocket.
Yes, you can claim tax deductions in Australia for some of this work. But you may not want to deal with the hassle.
A new property allows you to avoid those problems. There are stringent regulations in place to ensure all newly-built properties meet certain standards. They have to be built to a certain quality level, plus they must be energy efficient. This means you can feel certain that the construction quality of a new building will be high. As a result, you don’t have to spend more money on making improvements.
Benefit #3 – Lower Prices
A lot of people will tell you that it’s almost impossible to get a new property at a low price. Developers know the value of their properties and won’t sell for anything less.
This may be true when trying to buy a new property after the developer has already sold most of their stock. However, it discounts the potential savings you could by getting in early.
Keep your ear to the ground so you can find out about upcoming development work. If the houses are in a desirable location, you should try to get in as early as possible. Many developers sell their new properties for less than they’re worth to investors who make early offers. If you’re among that group, you’ll have a great property that cost you less than it should have.
Benefit #4 – You Attract More Tenants
We touched on this point earlier, but it’s worth coming back to. Tenants want properties that offer the latest appliances. They also want to pay as little as possible on their utility bills.
Buying an old investment property in Australia sometimes means that you can’t offer these things to your prospective tenants. The fixtures and appliances may be out of date, which lowers the demand. The property may also not be energy efficient. In the end, you have to charge less rent than you may wish so that you can attract tenants.
That shouldn’t be a problem with a new property. The developers will have installed modern fixtures and appliances, which attract more tenant applications. You don’t have to pay for renovations, plus, you can charge higher rents.
Benefit #5 – You Get a Blank Slate
Let’s assume you aren’t buying the property as an investment. Instead, you want to live in it yourself. If you buy an established, older property, you’re going to have to deal with the previous owner’s choices. You may have to spend a lot of money to change things until they’re just the way you like them.
When buying a new home, you have more choice. For example, you can discuss your preferences with the developer to ensure the home is built to meet your needs.
The prospect of having a blank slate appeals to many buyers. Plus, you get to enjoy the other benefit’s we’ve mentioned if you do decide to take on some tenants.
Don’t Be Put Off Because You Can’t Explore The Property
There are many things you need to consider when buying aninvestment property in Australia. While the process may be exciting, it can also be confusing.
One of the main choices you need to make relates to the type of property you buy. Do you purchase an older property that has a track record of generating income, or a brand new property that may stand a better chance of meeting the demands of tenants?
What if we told you there’s another way? Instead of buying a property that already exists, you can buy one that’s under construction. This idea may stray away from the property investment basics that you’ve read about while working out the complexities of investing in property for beginners. However, we can offer six reasons for why an off-the-plan property could prove to be a wise investment.
Reason #1 – Earn Early Capital Growth
What’s one of the first investment property tips for beginners that you’ve heard? It’s probably to buy low now so you can make a profit later. Buying an off-the-plan property allows you to do just that. So how does it work? It’s simple. You pay a deposit to the developer, and this secures your ownership of the property.
However, the construction settlement date may be several years in the future. As a result, you can earn capital growth for the home, even during the period prior to construction. You won’t even have paid the full price of the property before it starts making money for you.
Reason #2 – Stamp Duty Savings
Buying an investment property in Australia comes with a lot of added fees. The largest of these is often stamp duty. In most states, you will have to pay thousands of dollars in stamp duty before you can take ownership of the property. Take Victoria as an example. For a property worth $500,000, you’ll have to pay almost $20,000 in stamp duty.
Buying off-the-plan can help to avoid this major fee. Most states don’t charge stamp duty on properties that don’t exist yet, which means you make thousands of dollars in savings from the beginning.
Reason #3 – Extra Saving Time
You only have to put down an initial deposit when you buy an off-the-plan property. As we mentioned before, you may have to wait for a couple of years before construction finishes.
This gives you plenty of time to save some money. Once construction ends, you could have thousands of dollars that you wouldn’t have had if you’d bought an existing house. You can then put this money toward your home loan, reducing the principal so that you pay less interest on the loan over time.
Reason #4 – You Can Claim Depreciation
You may be planning on renting out your off-the-plan property when construction ends. If so, you may be able to claim thousands of dollars in tax deductions in Australia on the property.
Make time to create a depreciation schedule with the help of a quantity surveyor. This will highlight all the things that you can claim as depreciation upon completion of the property. This may include the new furniture and fixtures that you add to the property before making it available to tenants. The higher the depreciation, the lower your holding costs.
Reason #5 – You Can Pick the Perfect Plot
Showing early interest in a new development comes with its own advantages. In addition to benefitting from the lower prices that developers often charge to their early investors, you also get to choose from the best plots of land.
This will benefit you monetarily when construction ends. Getting in early means you can pick the property that will have the best views or offers the amenities that your tenants will want. As a result, you can charge higher rents, so your property generates more income.
Reason #6 – Reductions in Other Costs
A brand new property does not come with the maintenance needs of an old property. That should go without saying. You won’t have to earmark thousands of dollars for repairs, as the property should be good to go from the moment construction ends.
However, did you know that off-the-plan properties could save you money in other areas? It’s all thanks to recent changes in the Australian Building Code. New properties must now meet several energy efficiency criteria. This means the cost of utilities falls, which benefits both you and your tenants.
The Final Word
Buying off-the-plan may seem scary at first. After all, you don’t have the opportunity to explore the property before you buy it.
However, it opens the door to savings that you wouldn’t have access to with an existing property. To find out more about buying an off-the-plan investment property in Australia, contact Washington Brown today.
The fee you’ll pay for a depreciation schedule will vary. For example, you may pay anywhere between $275 and $800 for the report. This is a fairly standard price for an established residential home. All these properties aren’t brand new. This usually means you’ve purchased it from another investor or a former owner-occupier.
What causes this variance in price? It usually comes down to the quality of the service that the quantity surveyor provides. Paying less may mean that you save money in the short-term. However, it could also result in you claiming fewer tax deductions for your investment property in Australia.
To find out exactly how much a depreciation schedule for your own property will cost – request an obligation-free quote from our tax depreciation specialists here.
The Timeline Process
You’ll need a depreciation schedule for any established investment property in Australia. This allows you to create a timeline that contains details about the property’s history. These details usually include information about the property’s renovation work. Either you or the previous owner may have carried out this work. It will also mention the cost of that work, along with the completion date.
Your surveyor does this so you can assign a new depreciation life cycle to your second-hand assets. However, you can only do this on assets in a property that you purchased before the 2017 Federal Budget. You may not be able to claim tax deductions on the plant and equipment within a property that you bought after May 9th, 2017. The good news is that deductions on the structure of your property are unaffected!
The purpose of your timeline is to show what tax deductions in Australia you can claim. It will also create a schedule for these claims. This allows you to maximise the depreciation of your second-hand assets.
What Do I Get at the Lower End of the Scale
Let’s assume that you have decided to work with a quantity surveyor who only charges $300. That’s a few hundred extra dollars in your pocket, but the schedule you receive may not be as detailed as you would like.
For example, most surveyors at the lower end of the price scale don’t usually provide the following:
The option to use low-value and low-cost pooling to increase the amount you can claim
Completion of additional searches that would have helped to find approved works by previous owners that you can claim for
Full itemisation of the individual assets contained in the property
Adjustments of the effective lives of your second-hand assets
Furthermore, you may find that a cheaper surveyor does not have the relevant skills or experience. As a result, you don’t get the most out of your assets. You’ll still get a depreciation schedule. However, it won’t allow you to claim as many tax deductions in Australia as you may be entitled to.
What Do I Get With a More Expensive Surveyor
More expensive surveyors tend to provide better depreciation schedules.
You’ll receive all the following if you pay more for your depreciation schedule:
A completely accurate estimation of every tax deduction in Australia you can make
Access to more knowledge with regard to the latest tax legislation
Checks to ensure your depreciation schedule meets the Australian Taxation Office (ATO) requirements
A more reliable point of contact to ask questions
Such surveyors also have more experience, which they can use to your advantage. It’s unlikely you’ll present them with any scenarios that they aren’t familiar with.
What about Brand New Properties?
That covers any second-hand assets that you have in an established residential home. But what if you’ve bought a new property? These won’t contain any second-hand assets that need reporting on.
As a result, you can expect to pay less for your depreciation schedule. This is because most newly built properties come with more information. Your surveyor can use this to create more accurate estimates. They’ll have access to the costs of construction, floor plans, and, at times, even the value of the assets that came with the property. This means they don’t have to carry out the detailed inspections that they would to estimate the value of second-hand assets in an established home.
Even with this lower cost, you will still receive the same level of service. The depreciation report will apply the new assets the home contains to either an immediate or long-term pool. This ensures you can claim the maximum tax deductions in Australia on your property.
How Much Does a Depreciation Schedule Cost for a Commercial Property?
Prices may vary for commercial properties. After all, larger commercial properties require more work than regular-sized residential properties.
Schedules for small offices cost about the same as you’d pay for a residential report. However, the price may increase along with the size of your property. Even so, it’s worth getting a depreciation schedule. Not only will it help you with asset deductions, but you can deduct the cost of the schedule from your taxes as well.
LATELY I’ve noticed a few news articles about developer incentives being offered in various markets around Australia. I’m sure many of you would have seen the headlines.
In Brisbane, the developer behind a luxury apartment project in West End is offering buyers a car – a Toyota Yaris hatchback.
Another townhouse development in Corinda, in the city’s southwest, is offering a year’s supply of avocado on toast.
Further south there have been reports of a developer behind a Parramatta apartment block in Sydney offering $30,000 in cash.
Meanwhile, in Western Australia apartment developers have been offering up to 1 million frequent flyer points, amongst other incentives.
It’s not just limited to apartment developments; incentives are offered for house and land packages too, with free gift cards or even furniture packages.
Developer incentives are nothing new, and they often serve as a warning sign to buyers that something is amiss.
But lately I’ve been wondering whether there is any upside in being lured in by the incentive carrot at this point in time. Let’s examine the issue before making a determination.
The downside to incentives
Developers generally offer incentives because they need to get pre-sales in what could be a slow or oversupplied market, which in turn enables them to get a project up and running. Offering incentives is a marketing trick to lure buyers in.
The problem for buyers is that they could end up technically overpaying for a property and then having issues with obtaining finance.
You see, the incentive is usually offered in lieu of reducing the purchase price. So if the developer offers a $20,000 car, buyers might feel like they’re essentially paying $20,000 less for the property, but they’re actually paying the price on the contract which could actually be $20,000 too much as the incentive is built into the price.
So let’s say you buy a property for $500,000 with a $20,000 incentive. You might think you’re really paying $480,000, which is probably its true market value, but you’ve still contracted to buy the property for $500,000.
When banks assess whether they will give you finance, they usually don’t take the incentive off the price – they will look at the price on the contract, and the valuation must come up to par for a buyer to get finance. The problem is that since the property is probably worth less the valuation may not be high enough for the bank to lend to you.
Put simply, valuations can fail to stack up because the property is only worth the price minus the incentive, but you’ve contracted to pay the full price.
This creates a whole lot of confusion, and the easy solution would be for developers to just reduce their prices. This would be beneficial for buyers because they can pay less stamp duty, but developers argue that buyers have come to expect incentives, so it’s a box that needs to be ticked in their marketing strategy.
Is there any upside?
If there is a cash incentive, as a buyer you shouldn’t think you’re getting a discount because you’re actually just paying what the property is worth – ie. the net price.
So if you’re not really getting a discount is it worth taking advantage of a developer incentive?
Well, as I see it, you’d have to first look at why this particular developer is offering an incentive. They might well be desperate for sales, but they also might just want to get some quick pre sales to get things moving.
You’d then need to look ahead to the future. Even if the market is quiet it could turn around in time, which means you could benefit from getting in now.
In the case of apartments there has been a lot of press about an oversupply, particularly in Brisbane and Melbourne, which has impacted prices. But many experts believe unit prices will rebound in time as the supply and new development dries up, and houses prices become even more out of reach, leading buyers to turn to apartments for affordability.
If you buy a property where a developer incentive is being offered you’d probably need a discount on top of the incentive to ensure you can get finance and you’re not overpaying. Remember you generally make your money when you buy, by buying under market value.
Most importantly, do your research
You don’t have to stay right away from developer incentives but you should absolutely do your research before buying to determine if the property you’re purchasing is actually going to be a good investment.
Whatever you buy must have the right fundamentals to ensure it will grow in the future. If it doesn’t, you should forget about it.
On Friday 14th July, the Treasury Office released a draft bill regarding how depreciation deductions on a second-hand property can be claimed moving forward. They also invited interested parties to make submissions.
It’s complicated, to say the least, so I’ve tried to simplify this Bill and the key points. Here are my 9 Key Takeaways from the Legislation;
If you acquire a second-hand residential property after May 10, 2017, which contains “previously used” depreciating assets, you will no longer be able to claim depreciation on those assets.
Acquirers of brand new property will carry on claiming depreciation exactly the way they have done so to date. This is great news for the property industry and the way it should be.
We suspected this would be the case and I believe the property industry can collectively breathe a sigh of relief.
The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
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. This component typically represents approximately between 80 to 85 percent of the construction cost of a property.
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.
This is interesting and I suspect a lot more people will start buying properties in company tax structures.
If you engage a builder to build a house and it remains an investment property, you will still be able to claim depreciation on both the structure and the Plant and Equipment items.
If you renovate a property that is being used as an investment, you will still be able to claim depreciation on it when you have finished the renovations.
If you renovate a house, whilst living it in, then sell the property to an investor, the asset will be deemed to have been previously used and the new owner cannot claim depreciation.
Perhaps the most interesting point: Whilst 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, in summary, what you would’ve been able to claim in depreciation under the previous legislation, now simply gets taken off the sale price in the event you sell the property in the future.
Here is an example of how this will work:
Peter buys a property in September 2017 for $600k, included within the property was $25k worth of previously used depreciating assets.
As they were previously used, Peter can’t claim depreciation on those items.
Peter sells the property in 2022 for $800k, which included $15k worth of those depreciation assets.
Peter can now claim a capital loss of $10k ($25k-$15k) for the portion that Peter has not claimed in depreciation.
SUMMARY OF THE PROPOSED CHANGES
In my view, the Draft Bill could’ve been a lot worse for both the property industry and the Quantity Surveying professions.
It will certainly address the integrity measure concern of stopping “refreshed” valuations of plant and equipment by property investors.
It may, however, create a two-tier property market in relation to New and Second-hand property.
You can see the ads now “Buy Brand New – We’ve Got The Depreciation Allowances”.
It will still be just as critical for all property investors to get a breakdown of the building allowance & plant and equipment values so you can:
Claim the building allowance (where applicable) and
Reduce the CGT payable when selling the property by deducting the unclaimed Plant and Equipment allowances.
The Quantity Surveying industry, just like the property development industry just breathed a huge sigh of relief.
I believe this integrity measure could’ve been better addressed and will be making a submission accordingly.
But it wasn’t a bad ‘first run’ by the Government!
P.S. If you purchased an investment property prior to The Budget, and it’s been an investment property the whole time, you are not affected and you should get a depreciation schedule quote now.
Well, just like you claim the wear and tear of your car against your taxable income or the wear and tear of the desk in your office, you can claim the wear and tear of your property against your taxable income.
But the property must be income producing. You can’t do this on your residential house. Property depreciation laws vary from country to country. I feel we have pretty good depreciation laws in this country. In a lot of countries, you can’t claim depreciation. So we’re lucky in Australia.
In summary, any property depreciation you claim would reduce the taxable income by the amount of depreciation you claim.
Now there are two parts of a depreciation claim:
First part is what’s called the capital works allowance that relates to the building and the structure. It lasts 40 years. This is commonly referred to as the building allowance. Now the amount of the deduction is determined by the actual construction cost, NOT what it costs to buy the property.
And in order for you to claim this building allowance, the property must be bought after 1985 for residential properties.
The second part that we’re going to talk about is what’s called plant and equipment- division 40. It refers to things like ovens, dishwashers, carpets, blinds, and also common property like lifts, fire services, and ventilation systems.
Note: Deductions for plant and equipment items and the following information may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here.
Now, the more of this stuff you have in your property, the greater the tax savings. Why? Because this stuff wears out quicker.
Now let’s get into some tips:
1. The higher the building, the higher the depreciation
Why? Because it has more of that plant and equipment stuff that I’m talking about and this stuff depreciates faster. It also has things like gyms, pools, etc.
2. Old properties depreciate too
You’ve already paid something for it. So while you can’t claim the structure of the building, you may be able to claim the ovens, the dishwashers, the blinds, etc. This is because the plant and equipment is based upon what you pay for it and the effective life of each item can be a benefit. That means that if the carpets is going to last two years, you may be able to claim it over for 50% each year.
And at Washington Brown we are so confident that we actually guarantee our results. So if we can’t get you at least twice our fee in the first year, we won’t charge you!
3. Buy items that actually cost you under $300
For instance, if I was going to buy a microwave, I wouldn’t buy one that costs $330 because I would have to claim it at 20% per annum. However, I’d buy one at $295 because I would be able to claim it immediately.
4. Sometimes furnishing your property can actually result in a greater depreciation deduction
Why? Because the furniture depreciates rather quickly compared to bricks and concrete. So putting things like dining tables, bedding and all that stuff into a furnished property can actually accelerate your claim to the point that if you were to buy $20,000 worth of furniture, you could possibly get a $10,000 deduction in year 1 alone! But you’ve got to be smart about this. You can’t furnish all properties as it really depends on the location. So, this tip does not apply to all properties.
5. The actual construction cost must be used
Now that’s not a tip, that’s in the law. But what we found lately is that there are a lot of properties out there that are actually being sold close to their construction cost – certainly in some areas.
For instance, a property is sold at the original selling price of $95,000 in 2004. Our client just paid $45,000 for it. The original construction was $52,000. Now, I don’t know any other way that you can get a deduction greater than what you pay for something.
6. Utilise the residual value write-off
If you were to renovate a property that was built after 1985, you should get a quantity surveyor out before you do the renovation so that we can put some values onto items that you are about to remove and you can get a written down value of those items and claim it immediately as a tax deduction.
So if you remove the kitchen, the light fittings, the shelf screens, etc., all that stuff can be written off if your property was built after 1985.
For instance, you bought a property that was built in 1989 and in that property there was a kitchen that was originally installed and you now wish to upgrade it. If you were to demolish now halfway through its effective life, you could get a $10,000 immediate tax deduction for it! However, just remember that the property needs to be income producing before you rip it out.
So the tip here is to get a quantity surveyor out before you renovate a post-1985 property.
7. Always use an expert
Quantity surveyors have been recognised by the Australian Taxation Office to estimate construction costs where the costs are not known. Accountants and valuers for instance, are not allowed to estimate costs unlike quantity surveyors. However, be careful as not all quantity surveyors specialise in this service, but Washington Brown certainly does.
Also, as far as I know, a depreciation report is the only tax deduction that can be subjective and open to interpretation skill. Every other tax deduction is based on what you pay for it.
8. You get more depreciation on a new property
Now let’s have a look at the difference between the depreciation of a new property versus that of a four-year old property. It’s very similar to the effective lives of the property, that in fact, you’ll be surprised. Now, most of the deduction within a property is actually related to the building allowance. However, you’ll definitely get more depreciation on a new property compared to a pre-1985 property.
9. Use the Washington Brown Depreciation Calculator
Now, this is a good tip. You can go online and check the depreciation available on your own property using our calculator, the first calculator that uses live data! You can check new versus old properties, get an accurate depreciation assessment, and the great news is that it’s free!
Now, here are some bonus tips:
Bonus tip # 1: Don’t use a builder’s depreciation schedule
Builders are good at building. They miss out items and they sometimes don’t understand that the design and council costs can be included. Let a quantity surveyor do the depreciation schedule for you.
Bonus tip # 2: The type of materials is a huge factor
If you renovate, you might want to consider the type of materials you are going to use. For instance, carpets depreciate over 10 years but the floor tiling will depreciate over 40 so it can add up.
As another example, various types of partitioning may yield varying depreciation allowances. Some depreciate a lot quicker than others.
Moreover, we have air-conditioners and fans as examples too where the depreciation differs…
The types of materials used may vary and in turn, may change the depreciation allowance you can claim. So it pays to consider the item you’re about to install.
Bonus tip # 3: You can claim renovation even if you haven’t done the work
If you buy property that was built in 1900 for instance, but was renovated in 1990 not even by you, you can still claim depreciation. You can claim the renovation cost even if you didn’t do the renovation.
Bonus tip # 4:
Our iPhone app is downloadable from the iTunes store for free, enabling you to get numbers at the tip of your fingers! This great app also works on the iPad.
If you want to crunch the numbers yourself, you need to input the 5 pieces of information below:
The year the property was built
State of the finish within the property
Then, click calculate and Bingo! You can compare the depreciation deductions between the diminishing value method and the prime cost method!
And if you’re happy with the results, simply get a quote from us and give us a call so we can discuss the property over the phone. It’s all in the power of your hands!
Here are five things for you to take away today:
Old properties depreciate too
You don’t have to buy new to claim renovation
Renovation helps your cash flow
If you’re about to renovate a property that was built after 1985, get us out before you do so
Some people prefer to invest in brand-new properties, while others opt for older ones that they can renovate and re-sell for profit. So, which is the better investment strategy? Let’s have a look at some of the pros and cons of buying brand-new and almost-new properties. And depending on your investment strategy, you may pick up some helpful tips for your next purchase.
Buying new property will help investor cash flow due to greater tax depreciation benefits. Tax depreciation benefits are at their greatest when the property is brand-new. With brand-new property you are maximising your available tax deductions, which adds a significant boost to your cash flow position.
Depreciation allowances for new properties can yield big tax breaks. Investors can claim a 2.5% depreciation allowance on the construction cost. Plus you’ll also be entitled to claim the full amount of depreciation allowances on plant and equipment items, such as blinds, ovens, carpets and air-conditioners, which will all be brand new.
By way of example, the owner of a brand-new, Melbourne, high-rise unit recently purchased for $440,000, was able to claim $12,000 in depreciation in the first year.