rental property depreciation

Rental Property Depreciation

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Depreciation for profit

Tyron Hyde of Washington Brown discusses the depreciation implications of buying a year-old two-bedroom apartment compared to buying a new dwelling.

Recently there have been articles printed highlighting the drop in property prices in major capital cities. Mortgage in possession sales are increasing. Interest rates have been rising. And this has left many who bought at the top of the boom with negative equity in their home or investment property.

So does this mean now is a good time to buy? This is hard to answer but, that aside, the difference in the tax depreciation allowances between people who bought a new property at the height of the boom compared with people picking up a one-year-old rental property from a distressed investor.

Investors should focus on buying a property that will achieve the highest return (yield plus growth) – and let the experts worry about property depreciation.

Property depreciation can vary dramatically based on the purchase price, age and type of property. As a general rule, new high-rise apartments in a large complex will obtain the highest rates of property depreciation due to the fact that they generally have a lot of P&E (plant and equipment) in their facilities (for examples, lifts, security systems and gyms).

However, the difference in property depreciation allowances between a new rental property and the same property a year later, will be minimal.

For instance, a one-year-old two-bedroom unit in a variety of buildings will yield the following property depreciation allowances:

The main reason that there is minimal difference is because of the following:

However, when you depreciate P&E your rate of depreciation depends on the effective life of the particular item. Therefore, a second-hand oven is older, so you are able to claim the cost sooner.

It’s important for property investors to investigate whether they are entitled to any tax deductions on their rental property.

The easiest way to find out is by contacting a reputable quantity surveyor offering some form of minimum guaranteed return, or the report will be provided at no charge.

The quantity surveyor will ask a few standard questions to ascertain whether it is worthwhile for both parties to proceed. The fee to prepare a property depreciation schedule is 100 percent tax deductible.

High-rise one year old, two bedroom unit, purchase price – say $600k
First year claim First 5 years claim Total plant & equipment Total claim
$12-25k $50-65k $50-60k $280-300k
Medium-rise one year old, two bedroom unit, purchase price – say $450k
First year claim First 5 years claim Total plant & equipment Total claim
$9-11k $40-50k $35-45k $225-250k
Low-rise one year old, two bedroom unit, purchase price – say $350k
First year claim First 5 years claim Total plant & equipment Total claim
$6.5-8k $30-40k $30-35k $165-200k

These tables are for illustration purposes – they are of a generic nature only. They are NOT to be acted upon without specific advice relative to your investment property. Please contact this office if you require further clarification. As always you should speak to your financial advisor before acting on any investment. Washington Brown are not licensed financial advisors.