Finally, Some Clarity

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;

  1. 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.
  1. 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.Depreciation Quote Schedule

  1. The proposed changes only relate to residential property. Commercial, industrial, retail and other non-residential properties are not affected in the slightest.
  1. 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.
  1. 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.

  1. 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.
  1. 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.
  1. 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.
  1. 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

Depreciation CalculatorIn 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:

 

  1. Claim the building allowance (where applicable) and
  2. 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.

New Strata Laws for NSW

All eyes on forced sales as the new NSW strata laws are introduced

As of November 30, new strata laws have come into effect in New South Wales after many years of ‘toing’ and ‘froing’.

Whilst these changes encompass over 90 reforms, the one everyone is talking about deals with collective – or ‘forced’ – sales.

Essentially, there has been a softening in the current requirement that 100% of owners must agree to amalgamate and end their strata scheme in order for the unit block to be able to be sold to developers.

Now only 75% of owners need to agree. That’s right 75%! What about the remaining 25% you ask? Well, they can now be forced or compelled to sell.

This will no-doubt cause shock and outrage for some however this approach is not a new idea. For example;  other countries such as Singapore require a minimum of 90% of owners to agree. Closer to home, other states around Australia are also now pushing for similar legislation to be introduced in their respective territories.

The figures floating around suggest that more than 75,000 strata schemes and 2 million people will be impacted by this reform in NSW.

why

The reasoning

Why has the State Government introduced this reform? The simple answer is that they’re trying to encourage urban renewal.

There is a multitude of old and dilapidated apartment buildings across NSW, particularly in Sydney. Many are well-past their use-by date, and REINSW Strata Management Chapter Chair Gary Adamson notes that the cost of maintaining these is substantial. In some cases, this maintenance expense is almost equivalent to replacement cost.

Adamson states that introducing reforms to allow more sales to occur will not only alleviate the issue of residents having to fork out huge sums of money all the time, it will also allows for more higher-density accommodation developments to be built in areas close to major infrastructure.

This ‘more efficient’ accommodation is needed to cater for Sydney’s growing population. The city’s current population of more than 4 million is set to expand by nearly 50 per cent to 6.6 million in 2036.

All these extra people will need somewhere to live and chances are they’ll want to be close to amenities and services. Fair enough. This of course means that the only way forward for the city when it comes to meeting its rapidly growing housing demands is up. Indeed, it’s expected that by 2040 around half of Sydneysiders will live in strata accommodation.

While the collective sales law provides for forced sales if the minimum percentage of owners agree, it doesn’t necessarily mean the building will be knocked down to make way for a new higher-density building. The alternative is that the existing building can be put to better use by having a developer add apartments to the existing footprint and update the general block. In this case, owners can potentially move back in after the work is completed.

Forced Sale NSW Strata Law

The potential issues as I see it

Since it’s only just been implemented, we can’t exactly predict the benefits and consequences of collective sales as a result of these new laws.

While Adamson is aware there may be some issues arising from the reform, he believes overall it will be a positive thing providing much-needed residential accommodation in Sydney.

It will also allow those owners who do want to sell an opportunity as they will no longer be held back by a small minority. In some cases, one owner has refused to sell because they’re holding for a ‘pie in the sky’ price. I’ve personally heard of many situations where elderly owners don’t want to leave their homes and therefore won’t sell.

Some investors could also object to sales – many may want to hold their appreciating assets for the long term, and they also may want to avoid tax implications arising from any sale, with timing being critical.

The main issue that could arise out of forced sales is the way the sale proceeds are divvied up.

It appears that the proceeds will be divided between individual unit owners according to their unit entitlements, which are the lot owner’s share of the strata scheme. This is used to calculate levy contributions and determine the voting power of each lot owner. Depreciation Calculator

Unit entitlements are generally set when the building is constructed and the strata scheme is formed. It is important to note that in the past, there has been no requirement for unit entitlements to be based on a valuation of lots – rather they were largely determined at the developer’s discretion.

As such, unit entitlements don’t necessarily reflect the current value of the property. To illustrate this, consider two identical side-by-side units with the same unit entitlement; they might be now be valued differently if one has been significantly renovated and the other hasn’t been well maintained.

Owners that are forced to sell may, in particular, dispute the distribution of sales proceeds based on such examples.

In such cases, if the owners agree, the sale proceeds may instead be divvied up according to an independent valuation rather than unit entitlements.

The legislation, however, does provide safeguards for disputes over fair value. If the owners cannot reach an agreement, it will likely go to court to be decided.

What I can say with certainty is that there will be teething issues. “Nobody has gone through this so it’s yet to be tested,” says Colliers International Capital Markets Investment Services executive Tom Appleby. “It’s a grey area.”

Going forward, issues with unit entitlements versus real value should be reduced as it’s now been mandated that the former must be determined by a valuer rather than the developer submitting their own self-assessed unit entitlements.

Residential Vs. Commercial PropertyResidential vs commercial

The impact of the collective sales law isn’t restricted to residential properties either. Commercial and industrial properties are also in the mix.

In fact, Appleby believes it will predominantly be commercial buildings that are impacted.

There are many older commercial buildings in Sydney’s residential-zoned areas that are strata-titled he elaborates, and these properties provide great opportunities for developers to come along and build high-density units.

What’s more, he says, is that these commercial buildings will be cheaper to buy than residential apartment buildings.

Many commercial strata owners will be impacted by these sales, says Appleby. They might be reluctant to move but will be forced to, and will most likely be pushed out of owning and into leasing space.

“One of the major issues is there will be a shortage of commercial property to own, with older rundown (strata-titled) commercial buildings withdrawn from the supply and turned into residential buildings,” he says.

NSW Strata Laws NSWCould there be a big payday for unit owners?

Appleby says that owners in strata schemes should be aiming for 100% of owners to agree if they want developers to pay a premium, because the process for the developer will be hassle-free. Depreciation Quote Schedule

“It’ll be a headache for developers if they only have 75%, “ Appleby says. “Owners will really only get the ultimate premium if they’re offering the building in one line.”

While the objecting owners will be forced to sell in line with the new laws, Appleby says developers may have to fund legal proceedings to get the deal across the line which requires time, effort and money.

“It will be a stumbling block,” he says.

Speaking from a commercial standpoint, Appleby says that if the building is zoned for residential, then there will absolutely be a big payday for unit owners going down the collective sales route.

“Some owners are looking to get double what it was one year ago,” he says. “It depends on the zoning and where it’s located; some are looking at a lot more.”

Since the reforms have been mooted for some time, Appleby suggests that developers have been actively looking for commercial strata-titled buildings in good residential-zoned locations for at least a year to take advantage of the new collective sales law and build high-density units.

He states that many have approached owners directly, seeking to buy 75% and get control of the buildings to develop ready for when the new laws were implemented.

Rather than selling direct to developers, he says owners should be seeking to get professional advice to help them get the best possible price.

Other significant reforms

While collective sales are drawing everyone’s attention, there are a number of other interesting reforms to be implemented from the new strata laws, including:

More information about these other reforms can be found here.

 

Property Scams and the 13 Ways You Can Spot One

property scams

They’re suave, they’re slick and above all, they’re convincing, with their sales pitch down pat. Who are they? Property spruikers.

Unfortunately in Australia’s largely unregulated property advisory market spruikers – masquerading as experts – can flourish and their unsuspecting victims stand to lose a lot of money.

How can you avoid being preyed upon? We’ve identified some of the telltale signs of a property scam so you know when to run in the other direction.

 

 

This might come in the form of ‘special offer’ emails, cold calls from telemarketers or a letterbox drop. Or you might make the first contact yourself after seeing a seductive advertisement in a newspaper or magazine. Once they’ve got your contact details they’ll be persistent in their efforts to get you to sign up.

 

The spruiker will pull out all the clichés such as ‘offer of a lifetime’, ‘secrets’, ‘guaranteed growth’, ‘no money down’, ‘positively geared’, ‘get rich quick’ or ‘risk-free investment’. Many are unrealistic promises that a seasoned property investor can spot a mile away. But novice investors can be lured in.

Not all seminars are put on by spruikers, but this is a common way to target victims. You’ll receive an invitation to a free seminar, at which you’ll listen to a long spiel and be dazzled by a fancy presentation complete with glossy brochures, positive news story clippings, and detailed graphs and tables. Often they’ll either try and make you sign up for another – much more expensive – seminar or will book an appointment to talk to you one-on-one.

 

To earn your trust, the spruiker will be desperately trying to prove their credibility. They’ll have professional promotional materials, may associate themselves with reputable companies or charities, and will flaunt their own – whether genuine or not – success and wealth. They’ll try every trick in the book to get you to believe in them. Depreciation Calculator

 

This is the absolute giveaway sign that you’re dealing with a property spruiker. They’ll make it so easy by doing everything for you. They’ll provide you with a conveyancer, valuer, mortgage broker, an accountant and even a property manager. While this might sound perfect for novice investors, what they’re really doing is ensuring the deal gets done by taking control of everything. All of the supposed ‘independent’ professionals are part of the scam. They will have you signing on the dotted line before you can reconsider.

 

The purchase will require you to borrow against an existing property so you don’t get a valuation on what they know to be an overpriced home.

 

They’ll want you to sign on the dotted line as soon as possible, often under the guise of a ‘time sensitive’ opportunity. This is just designed to get the deal done before you have time to wise up and change your mind.

 

If you hear the term ‘rental guarantee’, alarm bells should be ringing. It might sound like a safeguard for an investor, but if a property is in demand by tenants why would you need the rent guaranteed? Chances are when the guarantee is up you’ll have long vacancy periods or significantly reduced rental rates. Or the guarantee will go by the wayside once the deal is done, as it won’t be worth the paper it’s printed on.

 

The person or company offering you this opportunity purports to be the only one with access to it. They’re choosing to offer it to you, for a limited time only. They’ll try to convince you that they’re the only people who can find you the right property. In reality you’d likely find a much better deal yourself.

 

The first thing a genuine, professional property adviser will do is find out about your individual circumstances before giving you options as to where and what to buy. They’ll consider your budget, goals, and whether you’re looking for a property that will give you capital growth or rental returns. A spruiker, on the other hand, will have a particular property they want you to buy from a stocklist. And unlike most real estate transactions, there will be no room for negotiation.

 

The spiel about the opportunity will often focus on the tax breaks it provides. While this is certainly a benefit of investing it shouldn’t be the primary motivation for buying. The main reason to invest is to build wealth. Depreciation Quote Schedule

 

Often the opportunity will be for a house-and-land package, with the promise of a stamp duty saving and bigger tax breaks through depreciation. You’ll need to compare the cost of these new homes with established ones in the area to ensure you’re not overpaying. Although you most likely will be.

 

They’ll go interstate to spruik to investors, hoping buyers won’t be familiar with the location of the properties they’re selling. These homes will often be in outer suburbs and in low socio-economic areas that may not have great growth potential, despite promises that they’re the next big ‘hotspot’. Ask yourself: if the market is so strong, why wouldn’t the locals be buying?

 

If you’re approached by what you suspect is a spruiker, before giving out any personal information – and hard-earned money – ask lots of questions to find out who they really are and what their motivations are.

Are they formally qualified as an investment adviser and how and what are they being paid?

While the promise of a ‘get rich quick’ scheme can be tempting, it won’t live up to expectations. If it sounds to good to be true, it probably is!

Property is an excellent vehicle to build wealth. Make sure to keep in mind that it takes research and education to get it right. It won’t happen overnight. It takes time and patience to grow your nest egg.

The best way to invest is to do the homework yourself to find the right opportunities. You should have a team of trusted professionals, including a finance broker, solicitor and accountant, to give you independent advice.

My Best Property Deal

Tyron Hyde was recently asked by Your Investment Property – “What was your best property deal?”

How long have you been investing in property?

Well about as long as I can remember! For me, the term “investing in property” means more than just buying an actual property.

I’ve been “invested in property” ever since I was about 17 and walked on my first building site.

I was that kid that would always stop and stare through the hoarding of a building under construction and look at amazement at the excavation and try to work it out.

It drove my girlfriend (now wife) stir crazy as we would often miss the start of the movie!

What was the best investment property deal you have made?

best property deal

My First Investment Property

My first property investment was probably the best deal I ever did.

It was over 20 years ago, and I had just started working at Washington Brown. We were acting as the bank Auditor on the redevelopment of the Balmain RSL.

I liked the area and knew the potential this site offered. Together with a friend we put down a $2,000 holding deposit on $259,000 unit.

The builder went into administration on the job, and the project took a lot longer to complete. Luckily, the values of the property rose strongly.

And by the time settlement took place, the prices went up so much we didn’t have to put our hands in our pockets because the price rise was all the equity we needed to settle.

We ended up selling the unit 2005 for $490,000. So we turned our $2000 into $231,000 in less than ten years.

So excluding taxes, stamp duty, etc.. that works out at around a 70% compounding return over a nine-year period!!

What did this investment allow you to do?

This investment allowed me to buy more property of course! Every property I have ever sold has always re-invested back into another property. Depreciation Calculator

In hindsight, with some of the recent price rises in Sydney, I wish I had found a way to hold onto them.

But it’s not always that easy.

What is your ultimate goal as a property investor?

My ultimate goal as a property investor is to live comfortably off the income I receive from my investments.

I have a mix of investments including commercial and residential and not all are based in NSW.

As I get older, I am more debt risk averse and don’t like borrowing that much if at all to fund these investments.

With Negative Gearing still around, I know this probably isn’t the wisest economic move, but it sure makes me sleep better at night.

When Do I Sell My Investment Property?

sell my investment property
One thing to remember with property investment is that your entry and exit costs are pretty high. You have to consider stamp duty, your advertising and marketing costs when you sell and the capital gains tax. Depreciation Calculator

Overall, you make your money in property when you’re buying. That is, if you buy right. If you think about the developers, they make money buying land. When they buy the development site, that’s when they make money, when they buy at the right price.

It’s the same with property investors. When you buy at the right time, you should be able to afford to hold the property for an extended period and hopefully over time it will generate income. If you buy something when you’re 30 years old, by the time you’re 50, hopefully your yield as a percentage of your purchase price will be 15 to 20% per annum, which is pretty good. It is like dividend growth from shares.

I know a lot of things could come up that could force you to sell – you will have children, you could get married or get divorced. There are many things that could change your investment strategy over time too. But most people, I think, go into property with the idea of holding it for a long time. They want to own it for an extended period.

As with any other investment, you’ve got to look at making money from it. People need to understand the entry and exit costs of property, including capital gains implications. I don’t think enough people who sell properties try to work out whether they have made money or not. In order to cover all those costs, sometimes you really need to hold for a while.

A lot of investors don’t factor in the entry and exit costs when they work out their true profit. For instance, if you’ve bought a $500,000 property, you’ve got around $50,000 in entry and exit costs. So you need around 10% profit before you make money. But once you’ve done that, it is all blue sky.

Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!