So how does commercial property really stack up against residential in relation to depreciation?
While we have covered the differences between the two, there are also some similarities.
For example, the higher the quality of the commercial property the higher the depreciation. And the taller the building in commercial property, the higher the depreciation allowance. This is the same for residential property. Also, similar to residential property, the newer the building, the higher the depreciation allowance will be.
Let’s now crunch some numbers, using the Washington Brown depreciation calculator.
Note, also, that you will get more depreciation on a commercial suite than a factory unit or industrial suit). This is because a factory unit does not have as much plant and equipment. It is nearly all made up of concrete and steel.
In short, if you are the tenant in a commercial property, and think now might be a good time to become the owner-occupier, don’t forget to claim those tax depreciation allowances available to you as a landlord.
Or if you’re an investor, don’t exclude commercial property as an option. The depreciation is still beneficial as yields can be higher.
Let me share with you two projects we’ve worked on across various sectors. Including commercial, hospitality, retail and office/warehouse to illustrate the depreciation benefits for different investors.
CASE STUDY: Lend Lease
When I started way back when, never in my wildest dreams did I think I would be preparing reports for a multi-national company like Lend Lease. But I’m proud to say, over the years we have prepared many reports for them. From multi-million dollar shopping centres in Victoria and New South Wales, to factories in Queensland, and retail warehouses in New Zealand. Lend Lease likes that we go the extra mile.
The key to preparing depreciation reports on these types of commercial and industrial properties lies in the research.
For example, Lend Lease purchased a 20,000 square metre shopping centre in Port Macquarie. The site had already undergone multiple upgrades over various years. One approach would have been to visit the site and make an estimation based upon any drawings we might have been provided with, inspect the site and discuss any changes that may have occurred with the building manager. But I always find that you need more than that.
With large projects such as a commercial shopping centre, you should always contact the council and sift through the endless archival documentation they have. This can sometimes take a whole day. There can literally be hundreds of files to sift through as each time a new tenant moves in and out, council generally has records of that move. Every time the previous building owner made changes to the building, council will have recorded the event. The advantage of going to council is that you ascertain when and what type of upgrades were completed. Sometimes the information even includes the estimated cost of the upgrades and plans of the work that occurred. This builds up a great case to go back to the client and say, “Look at all this extra stuff we discovered you can claim, and here’s how we can prove it.”Lend Lease liked that.
CASE STUDY: Ford Factory
When I first started preparing depreciation reports, I initially focused on residential investment property. Not because the reports are that different, we just hadn’t been engaged to prepare reports for commercial property. So when one of my mentors, the distinguished quantity surveyor Jim Ford, offered me the opportunity to work with him on the depreciation report of a Ford factory in Queensland, I jumped at the chance.
Off I flew to Jim’s office in Brisbane and started work on this project. I had never been to another quantity surveyors’ office before and I have to admit I was nervous.
I sunk my teeth in. The more I researched the part of the Tax Act relating to the manufacturing industry, the more areas I found where we could save our client money.
Remember, this was early on in the game. There were very few quantity surveyors specialising in this area. I discovered a little known part of the Tax Act that allowed this type of factory to claim building allowance at a rate of 4% per annum in comparison to the standard 2.5% per annum. You may think 1.5% doesn’t sound like a lot, but on a $10 million construction cost – that’s an extra $150,000 the client could write off every year.
Both Fords were very pleased.
Spend Less with the Right Tactics
Information goes a long way when you’re buying an investment property in Australia. Without information, you can’t prepare for the negotiations. This is when you sit down with the seller to try and find the right price for your investment property in Australia.
However, the information you have isn’t the only weapon in your arsenal. There are plenty of other tactics that you can employ to get a good deal. With that in mind, we’ve come up with five hot investment property tips for beginner negotiators.
Tip #1 – Learn as Much as You Can About the Seller
You may think the state of the property market would make it impossible to negotiate a good deal. If property prices are going up, it’s easy to assume that all sellers you meet will ask for more money.
However, this line of thought doesn’t take the seller’s situation into account. You need to find out everything you can about the seller when buying an investment property in Australia. For example, do you know the reason why the seller is getting rid of the property? If not, then you need to find out.
Many people sell because they’re in distressed situations. They may be in financial difficulties, or need to sell quickly to fund a new purchase. You can use this to your advantage and negotiate a better deal. After all, a motivated seller is one who will listen to lower offers.
Tip #2 – Sweeten the Deal
This ties into our first tip. Sometimes, a seller wants something really specific, which will make your bid for their investment property in Australia more attractive.
Consider the following example. The seller is currently going through a divorce. It’s a heartbreaking and emotional situation, but they really need to sell their property before the divorce is settled. As a result, that seller may be looking for a buyer who can help them settle the sale quickly, so they can get on with the rest of their life.
That’s where you come in. If you limit the terms attached to the transaction, you can speed up the process. That gives you some leeway to negotiate a lower price with a seller who wants to get rid of a property quickly.
Tip #3 – Get Pre-Approval on a Home Loan
Sellers love serious buyers. If you enter negotiations knowing that you don’t yet have the money to make the purchase, you’re going to sour the seller to any offers you might make.
This means it’s best to get pre-approval on a home loan before you try to buy an investment property in Australia. Lodge your application and ask your lender to provide proof of the pre-approval.
You can then take this into your negotiations. Having pre-approval shows that you’re a serious buyer who wants to move forward. This will make the seller more willing to negotiate terms with you, which could be your pathway toward making a lower offer that saves you some money.
Tip #4 – Make the Right First Offer
The first offer you make on your investment property in Australia is crucial. Go too low, and you may insult the seller so much that he or she stops taking you seriously. Make a high offer, and you may end up spending more than you need to.
This is where your research is going to help. Find out how much similar properties in the same area are selling for. You can use this to get an approximate figure for the value of the property. Compare this to the seller’s valuation to ensure you’re both on the same page.
From there, you need to make your offer. It’s usually best to offer somewhere between 5 and 10% less than the seller’s valuation. This shows you’re a serious buyer, while giving yourself some wiggle room if the seller comes back to you with a higher figure.
Tip #5 – Don’t Mention Your Budget
Remember that your seller’s agent is going to try and extract as much information as they can from you. After all, they want to secure the highest possible price for their clients.
Talking to the seller’s real estate agent can offer you more information. However, it can lead to you giving away information that the seller could use against you.
The key is to not let the seller know how much you’re willing to spend. If they have that figure, negotiations are going to start at a much higher price than you had hoped for. Play your cards close to your chest, while still making offers that show you’re a serious buyer.
You Could Use Your SMSF to Save on Your Tax Bill
You can use a SMSF (self-managed superannuation fund) to buy an investment property in Australia. However, this has previously been quite difficult. Many lenders would not allow SMSFs to borrow money, which means they had to fund the full purchase themselves.
However, that changed after the 2017 Budget. Now, a self-managed super fund can borrow the money needed to fund the purchase of an investment property in Australia. As a result, those who previously couldn’t afford to use their SMSFs to buy an investment property in Australia now have a pathway to do so.
The first thing to remember is that you shouldn’t set up a SMSF solely to buy a property. However, having it available makes sense for a lot of small business owners. After all, a business owner can occupy the SMSF’s investment property in Australia, as long as they use it for business purposes.
However, managing an SMSF takes a lot of time and hard work. To help you along, we’re going to show you some of the secrets of using an SMSF for property investment.
You’ll need some money in your SMSF before you can use it to buy an investment property in Australia. How much will depend on your situation, but as a rough guide you should aim to have $200,000 available.
This will help you to cover the deposit and the fees associated with taking out a home loan. Furthermore, you’ll probably have some money left over for diversification. This is important, as investing only in property could come back to bite you if the market crashes.
The funds should come from every SMSF member. You don’t have to fund the entire thing yourself.
Know How Much You Can Borrow
Most lenders are still quite wary of lending to SMSFs. That shouldn’t come as a surprise, as many have only just started doing so following the 2017 budget. As a result, it’s unlikely that you’ll be able to secure a home loan with a loan to value ratio (LVR) above 80% of the home value.
In fact, most lenders prefer to offer 50% LVR on SMSF loans. Having a 50% deposit available for your investment property in Australia increases the lender’s confidence and puts the property closer to being positively geared.
Of course, you need to make repayments on the home loan once you’ve secured it. This is where the self managed super fund can really help an investor. You can use your super contributions, which you can deduct from your taxes, to make the repayments. The same goes for any rent or other payments that the SMSF receives.
As a result, you often won’t need to spend any of your own money to repay the home loan. Better yet, you can deduct quite a large portion of the repayments from your tax bill. Of course, it’s best to work with a tax professional to ensure you set up the correct structure for this.
The Tax Benefits
Let’s look at the tax benefits of buying an investment property in Australia using an SMSF in more detail. For one, the fund only has to pay a maximum tax rate of 15% on any income the property generates.
However, the bigger benefits come if you choose to sell the property. Assuming the SMSF has held the property for at least one year, you only have two-thirds of the capital gains tax (CGT) you would have paid on a property you personally own.
Better yet, both of these tax contributions disappear if the SMSF keeps the property until its members start claiming their retirement pensions. As a result, retired SMSF members can benefit from the property’s income, without having to pay any tax. They also receive larger lump sums if the SMSF sells the property because they don’t have to pay CGT.
Can Everybody Do It?
Property investing using an SMSF sounds appealing, and it can provide you with a lot of benefits. However, it’s not for everybody.
As mentioned earlier, you should avoid using your SMSF to invest in property if it doesn’t have a large sum of cash available. Diversification is crucial when investing, so you don’t want to be in a situation where your SMSF relies only on the property’s income. A lost tenant or property market crash could cause major problems.
Furthermore, those on low incomes should think twice about investing using an SMSF. Remember that you have to make regular SMSF contributions. These contributions benefit you when it comes to your taxes, but they’re also long-term benefits. You may struggle in the short term if you don’t have the money to make regular SMSF contributions.
How does investment property depreciation work?
What is depreciation?
Let’s start right at the beginning. Depreciation is basically a tax deduction available to property investors. Your investment property earns an income (in the form of rent from your tenants). So, as with any activity that produces an income, there are various tax deductions available to you.
Normally these tax deductions are things you’ve spent money on, such as property management fees, council rates and other miscellaneous items. You pay an amount of money, you receive a tax invoice and receipt, and you use that piece of paper to claim a tax deduction when tax time rolls around.
However, property depreciation is what the tax office calls a ‘non-cash deduction’. This means you don’t physically fork out cash in order to claim a deduction. I have also heard it referred to as ‘on paper deductions’ for the same reason. Depreciation allows you to claim a tax deduction for the wear and tear on an investment property over time.
This tax deduction recognises the fact that the building itself will become worn out over time and eventually need to be replaced. This also includes its plant and equipment; for example, air-conditioners, blinds, and carpet, etc. It doesn’t matter that these items were paid for by someone else – a developer or previous owner – you, the current owner, can continue to claim deductions as they continue to depreciate in value.
As with any tax deduction, depreciation basically reduces your taxable income. So if your income was $100,000 for the year, and you claim $10,000 worth of deductions, you only pay tax on $90,000. The table below shows you the difference depreciation can make to monthly returns from your property investment.
Of course, these calculations are for the purposes of illustration only. The exact amounts depend on the age of your property and various other variables. This is all covered in my book, CLAIM IT!
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!
I recently gave a webinar titled “8 Things You Don’t Know About Depreciation”. The feedback was excellent.
During the webinar, the most insightful topic I spoke about was on the effective life of depreciable items.
(NOTE: 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).
You see, when you buy an investment property part of the purchase price includes things such as carpet, ovens, blinds and other loose items.
The Australian Taxation Office (ATO) determines how long these types of items will last for. This determination then governs how much you are able to claim annually.
Simply put, if the carpet in your brand new house has an effective life of ten years and has a value of $1,000, you can claim $100 per year over a ten year period. Simple right?
But what happens when you acquire carpet that is seven years old?
Well, you (or a qualified quantity surveyor) can reassess the life of the carpet and assign a new effective life.
For instance, if the carpet is seven years old, you can say the carpet is only going to last for three more years. So now you can claim the remaining value at a rate of 33.3% per annum for the next three years to equal the same deductions you would have received over the ten years.
Effective life deductions can make a huge difference to the annual amount you as a property investor can claim!
I can think of many reasons why the Sydney property market is set for a major correction and I can think of many reasons why it won’t.
I guarantee you I could find five experts to argue that the Sydney property market won’t crash, and I could find five experts to reason why it will.
But I’m going to tell you my number 1 reason why the Sydney property market won’t crash. Wait for it. Drum roll, please…
The number one reason the Sydney Property market won’t crash is….
IT’S TOO BLOODY OBVIOUS.
You see, you don’t see market crashes coming. And every day at the moment I can find an article predicting the end is nigh.
How many of you sold all your stocks just before the GFC? In hindsight, it was pretty obvious that was coming. Seen the movie the Big Short?
Any of you sell all your tech stocks before the crash? Remember the Asian economic crisis in 1997…did you see that coming?
Well, I didn’t.
At the moment it’s TOO obvious to predict a Sydney market crash, every other day the AFR is warning that an oversupply of apartments is coming.
Depreciation on Holiday Homes
Go on holidays and claim depreciation!
The ATO has recently announced a crackdown on property investors over-claiming deductions on holiday homes, this includes depreciation.
If you’ve been on holidays, it’s very easy to get caught up in the romance of owning your own holiday home.
Purchase price, stamp duty and mortgages offset by the rental income can make it look good in the halo of optimism that comes with the first flush of real estate lust.
The “we have got to have it and we will make it work” compulsion is common when purchasing lifestyle properties.
Holiday houses can be depreciated if they are rented out to a third party but that doesn’t mean you can’t stay there when you want to.
As long as it’s available for rent most of the year you can block out a two-week period over Christmas and claim the depreciation pro rata.
You are still entitled to that deduction regardless of how many weeks the property is actually rented out, as long as it was available for the full 50 weeks.
TIP – Make sure you pro-rata any depreciation claim if you have used the property personally.
If you own a holiday home – make sure you start the ball rolling with a depreciation schedule by getting a quote here.
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 [email protected]. 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.
Time to spring in to action!
Don’t Forget Depreciation on Your Spring Renovation
I don’t know about you, but every time I see that sun coming towards spring– I start thinking “What can I fix up around the house… or who can I get to do it!”
But before your excitement gets you too caught up in painting your cupboard a crisp lime green, or thinking whether your wallpaper should have a touch of yellow or orange, it is helpful to remember the exciting benefits you may get with depreciation. After all, wouldn’t renovating be more rewarding if you knew that part of your expenses would come back to you through tax deductions?
How does it work?
When you renovate an investment property, you can actually claim particular expenses that you incurred as part of your renovation work. This includes the cost of that tile work you just did for your bedroom, or maybe that new edgy and urban kitchen sink. These things can actually get you a depreciation claim of 2.5% annum over a 40-year period. Even upgrading your plant and equipment items such as appliances and furniture also qualify for depreciation. Talk about claiming a reward for rewarding yourself! Where else can you get that?
2 Tips to get you excited this Summer
Property Tip 1
Scrapping reports – If you buy a property and are going to renovate the property, it’s worth getting a Quantity Surveyor out like Washington Brown, who will attribute values to those items that are about to be removed. This can add up to a substantial amount, especially if the property was built after September 1987. In order to do this, the property has to be income producing prior to the commencement of the renovation.
Property Tip 2
Depreciation Schedule – Once you’ve got your hands dirty and completed that renovation – get a depreciation schedule prepared on the new work that has just been completed. The depreciation process starts all over again!
Now, off you go with a spring in your step , knowing that your renovation work didn’t cost all that much since you have tax deductions to expect by the end of the year.
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.
Why the ATO is wrong
The other night in bed….I was reading an article on the ATO Website (yes I’m a bit weird), titled “Where do you get the construction cost information?”.
I was a little shocked when I read the last paragraph that stated “Note: Remember to obtain your construction costs report as soon as possible as these reports can take a long time to prepare.”
At first I thought, wow even the ATO recognises that it’s not always that easy and fast to:
- Get all the information required to prepare a report (Including any work carried out by the vendor or previous vendor if handed over at settlement
- Liaise with the tenant and property manager to get access
- Inspect the property
- Compile the data
- Prepare the actual depreciation schedule
The other issue is that Quantity Surveyors get inundated around June and then are quieter from November to February.
So, Washington Brown is committed to proving the ATO is wrong and here’s how.
We have a 7 day guarantee!
This means: after we have received all of the required information AND completed the inspection for the property we will have your report completed within 7 days!
The key here is do it now! – You’ll get your report within 7 days guaranteed if you order your report here now!