Whenever I give a seminar about Property Depreciation, I always have a Question & Answer session at the end
In the seminar, I discuss how I created the Property Depreciation Calculator and spoke about how it helps property investors make informed decisions about the type of rental property they want to buy.
Then this guy up the back puts his hand up the back and asks, “What’s so special about your Property Depreciation Calculator?”
“Well”, I say, “Let me tell you…”
“I’m pretty proud of our property depreciation calculator. It took me 4 years to build and is the only one of it’s kind. In fact, it’s the only property depreciation calculator that lets you work out the depreciation of a property based upon a proposed purchase price.”
“You see, I believe you can’t really work out the depreciation of a property by entering an area. And, let’s face it, how many of us know the internal unit area of our property. Do we include balconies, garages, common areas etc… That’s why I think the other calculators on the market that use an area are flawed.”
I’m pretty excited by now, and I go on…
“I’ve got to be honest, when I first started creating this, well, I had more hair!! It was a long and arduous task.”
“I think no two houses are the same. So, basing the depreciation of a property on it’s area is flawed. I wanted to create a property depreciation calculator where people could enter a proposed purchase price and easily get a result.”
“Now, in order to do that we needed to come up with a way where the calculator would grab lots of similar property types, add them up and average them out.”
“That’s why it took 4 years to build. We needed enough data in the calculator to make it a calculator that property investors could use. And today, I’m proud to say, day in – day out… It remains the most used part of our website.”
“We’ve actually got a patent pending on it… Again, a reason why I’m proud.”
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
Where should you buy property in 2016?
AFTER a few years of strong growth Australia’s property market appears to be cooling.
But this doesn’t mean investors should shy away from buying; in fact, it’s just the opposite.
It’s an opportune time to buy due to slower price growth and a record low cash rate, and while the overall market is experiencing a slowdown, there are always with growth potential to be found.
Where are they? Let’s first take a look at what’s happened over the past year before gazing into the crystal ball.
The current state of play
Property prices grew by 7.8% over 2015, with Sydney and Melbourne leading the charge, according to CoreLogic RP Data figures.
Sydney values were up by 11.5% at the end of the year, while Melbourne values were up 11.2%, despite both seeing a slight drop in values over the last quarter.
While Sydney was the standout performer at the start of last year, Melbourne has now started to take over.
In the first month of 2016, Victoria’s capital saw growth of 2.5% compared to 0.5% in Sydney, and the performance difference between the two over the past six months has been significant, with Sydney seeing a 0.6% drop in values and Melbourne seeing a 3% rise.
Outside these perennial favourites, over 2015, there was little growth in other capital cities.
Brisbane and Canberra saw a moderate increase of 4.1% in property values, while the other capitals all had fallen. Perth and Darwin experienced the biggest declines of 3.7% and 3.6% respectively.
What’s in store for 2016?
Many experts believe the property market is likely to be slower this year, with subdued growth and lower rental returns.
Affordability will be a factor hampering growth in some markets, particularly Sydney and Melbourne, where the median dwelling price is now $776,000 and $595,000 respectively, according to CoreLogic RP Data.
Another factor impacting demand is the regulatory crackdown in the mortgage market, which occurred in 2015 and has led to higher interest rates, particularly for investors, who have since scaled down their activity.
Despite expectations of softer conditions this year, dwelling values did experience a small rise of 0.9% in January, according to the CoreLogic RP Data Hedonic Home Value Index, which could be an indicator they won’t fall.
In any case, we know that the property market is never a ‘one size fits all’ and with so many submarkets there are always areas experiencing growth.
Investors need to start by looking at a state level before drilling down to individual suburbs and then even further into pockets within those suburbs.
Which states will shine?
While Sydney and Melbourne have come off the boil, their strong economies are expected to see property price growth level out rather than fall this year.
Other states are due for some stronger growth, however, and the one coming up on everyone’s radar is Queensland.
The south-east corner of the state is the area many are picking for growth over the coming three to five years.
Growth in South East Queensland over the past two years has been slow and steady, and predictions are that this will continue.
Interstate investors are being drawn to the area largely due to its affordability and higher rental yields.
Not only are prices in Brisbane around 40% cheaper than those in Sydney, with the city having a median dwelling price of $478,200, but property is also substantially cheaper than in Canberra, Darwin and Perth, which have median dwelling prices of $587,500, $520,000 and $515,000 respectively, according to CoreLogic RP Data.
The Perth and Darwin markets aren’t expected to experience growth in the short to medium term – and in fact, may experience further falls – but this means there may be some good buying opportunities at the moment for those looking at the long term.
Adelaide and Hobart have been ticking along steadily and the affordability of these areas means there are opportunities for investors looking in the right areas.
Hobart, which has the most affordable median dwelling price of all the capitals, some 20% lower than Adelaide, is already showing signs of growth with a significant 4.7% rise in dwelling values over January alone.
Canberra also experienced growth over the first month of this year with a 2.8% rise in dwelling values.
While experts warn the latter two markets are more prone to ups and downs, there are opportunities for investors, particularly for those looking for higher rental returns, with Hobart having the highest yield of all the capital cities at 5.4%.
Claiming depreciation is one of the most important steps in an investor’s journey. Here’s my Top 5 Tax Depreciation tips to maximise the return on your investment property.
Number 1: Use an Experienced Quantity Surveyor
You’ve just paid hundreds of thousands of dollars for a property. Do you really want to risk missing out on tens of thousands of dollars in deductions just to save a couple of hundred tax deductible dollars on the ONLY tax break available to you that can be open to interpretation and skill?
The ATO has identified quantity surveyors such as Washington Brown as appropriately qualified to estimate the original construction costs in cases where that figure is unknown. The laws have also changed frequently over the years and each building is unique, so it pays to get expert advice. The ATO requires all companies who prepare Tax Depreciation Schedules to be registered Tax Agents.
Number 2: Claiming the Residual Value Write Off
I believe millions of dollars will be missed over the coming years in tax depreciation claims due to changes in what can be defined as ‘plant and equipment’.
If you are renovating a kitchen or bathroom in a property built after 1985 – get a quantity surveyor in before you demolish so they can assess what the residual value of the existing items are. This residual value can be claimed as an outright deduction and can generate huge savings in the first year (The plant and equipment component of this may now be considered a capital loss rather than deduction from your personal income taxes due to recent Budget changes).
For instance, a rental property with a 20 year-old kitchen could possibly attract an immediate deduction of around $5,000 if removed.
The added bonus is that you get to claim depreciation on the new work once it is complete too!
Number 3: Small Items and Low Value Pooling
A dollar today is worth more than a dollar tomorrow so deduct items as quickly as possible.
Individual items under $300 can be written off immediately. An important thing to remember here is that provided your portion is under $300 you can still write it off.
For instance, say an electric motor to the garage door cost an apartment block $2000. If there are 50 units in the block, your portion is $40. You can claim that $40 outright – as your portion is under $300. You can also try to buy items that depreciate faster such as purchasing a microwave that costs $295 as opposed to one that costs $320.
Items between $300 and $1000 fall into the Low Pool Category and attract a higher depreciation rate. So for instance, a $1200 television attracts a 20% deduction whilst a $950 television deducts at 37.5% per annum.
Number 4: Old Properties Depreciate too
Even properties built before 1985 (when the building allowance kicked in) are worth depreciating.
The purchase price of your property includes the Land, Building and the Plant and Equipment. As a quantity surveyor we help you apportion or break down the purchase price into those categories.
In about 99% of cases we find enough plant and equipment items to justify the expense of engaging our firm (for ‘Pre-Budget’ properties). At Washington Brown we guarantee to save you twice the fee of engagement or your report will be free!
Number 5: Use the Washington Brown Tax Depreciation Calculator
The saying goes “if only I knew then what I know now!” When it comes to depreciation, you can. Investors can use our website, free of charge, and get an instant estimate of the likely tax depreciation deductions on a property before they buy it.
This calculator uses real life data collated from every inspection we do on behalf of our clients. So the data gets more accurate with time.
For more information on depreciation or to discuss your specific investment property, call us on 1300 990 612 or email sales@washingtonbrown.com.au. Tyron Hyde is a director of Washington Brown – The Property Depreciation Experts. He has a degree in construction economics and is an associate of the Australian Institute of Quantity Surveyors.
Calculate It!
When I was on stage giving a seminar about Property Depreciation, I always have a Question & Answer session at the end.
In the talk… I discuss our Property Depreciation Calculator and how it helps property investors make informed decisions about the type of rental property they want to buy.
Then this guy up the back puts his hand up the back and says
What’s so special about your Property Depreciation Calculator?
“Well”, I say, “Let me tell you…”
“I’m pretty proud of our property depreciation calculator, it took me 4 years to build and is the only one of its kind. In fact, it’s the only property depreciation calculator that lets you work out the depreciation of a property based upon a proposed purchase price.”
“You see, I believe you can’t really work out the depreciation of a property by entering an area – and, let’s face it, how many of us know the internal unit area of our property. Do we include balconies, garages, common areas etc…You see that’s why I think the other calculators on the market that use an area are flawed.”
I’m pretty excited by now, and I go on…”I’ve got to be honest…when I started creating this property depreciation calculator, well, I had more hair!! It was a long an arduous task.”
“You see, I think no two houses are the same, and that basing the depreciation of a property on it’s area is flawed. So I wanted to create a property depreciation calculator where people could enter a proposed purchase price and easily get a result.”
“Now, in order to do that we needed to come up with a way where the calculator would grab lots of like type properties add them up and average them out.”
“That’s why it took 4 years to build, we needed enough data in the calculator to make it a calculator that property investors could use. And today, I’m proud to say, day in – day out…it’s the most used part of our website.”
“We’ve actually got a patent pending on it…again why I’m proud.”
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
Before getting scared off by the following explanation, you need to know that a quantity surveyor can inspect your property and prepare a depreciation schedule for you. All you’ll need to do is hand it over to your accountant at tax time. And that’s all you need to know, if you wish. If you do your own tax return, you can easily include the figure from the quantity surveyor’s report yourself. You don’t need to worry about complicated calculations. In practice, it’s as easy as a phone call to a quantity surveyor to ensure you get all of your allowable depreciation deductions. He or she will produce a one-off report you can use year after year, and you can claim the cost of that report as a tax deduction as well.
Many investors, however, will want to understand the process for themselves. So, now for the nitty gritty. Here is an explanation of the laws behind depreciation. To give you some background, there are two parts of the Income Tax Assessment Act 1997 we are dealing with here:
- Division 43 (Capital Works Allowance); and
- Division 40 (Plant and Equipment)
The capital works allowance (more commonly referred to as the building allowance) refers to the construction costs of the building itself, such as concrete and brickwork. Plant and equipment refers to items within the building like ovens, dishwashers, carpet and blinds, etc.
Each of these two categories incurs claims. The building allowance is calculated at between 2.5% and 4% per year of original construction costs (depending on the date of construction). Plant and equipment has a number of categories in which items are claimed at different percentages over their effective life. I’ve used the Washington Brown depreciation calculator to demonstrate the following example of how much you can claim on a standard $400,000, high-rise, two-bedroom unit in Melbourne.
Example of Property Depreciation Calculated:
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!