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

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

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

Depreciation on three types of residential investment property

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

Depreciation on a brand-new property

Depreciation on an old property

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

How the new depreciation laws affect depreciation on old property

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

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

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

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

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

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

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

Try Washington Brown’s proprietary Property Depreciation Calculator

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

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

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

Depreciation Old Investment Property

Depreciation Calculator

I often get asked, “Can I claim depreciation on my very old investment property?”

The simple answer is yes, but this is where a lot of investors make a mistake.

There are two components to a depreciation schedule Quantity Surveyors prepare on your investment property.

The Building Allowance

The first component involves claiming what’s called the “Building Allowance”.

The Building Allowance relates to the structure of the building. It includes things like brickwork, concrete, windows and even the kitchen sink!

Unfortunately, this part of the claim is date dependent.

If construction of your residential property began after the 16th of September 1987 – yes you can claim the Building Allowance. If construction started prior to this date – I’m sorry – you miss out on the claim.

Plant & Equipment

However, ALL properties are eligible to have the Plant and Equipment component of the building depreciated.

(UPDATE: Deductions for these plant and equipment items may only apply if you bought the property prior to May 9, 2017 – Read about the Budget changes here).

Claiming depreciation on Plant and Equipment relates to the wear and tear of items within your investment property, like carpet, ovens, dishwasher etc.

These items actually wear out more quickly and therefore can be claimed at a higher rate, over a quicker amount of time.

If you need a quote for depreciation on your old property – click here.

Here’s a video in relation to claiming depreciation on an old house.