When thinking of investing in property, investors tend to focus more on the location, the purchase price, rentability and the likely returns. However, an often overlooked but most important factor is depreciation. Property depreciation is a tax deduction available to owners of income-producing properties and can result in thousands of additional dollars for the investor at the end of each financial year. The Australian Taxation Office (ATO), allows property owners to claim this depreciation as a tax deduction.
There are two types of property depreciation – the Capital Works Deduction, which refers to the structural and long lasting items of a property such as slabs, floors, walls and ceilings (claimable at 2.5% of cost pa); and the Plant and Equipment Deduction – which covers the removable items from a property such as carpets, blinds, air-con, cupboards, appliances, etc (claimable at 10-30% pa depending on the item). When it comes down to investment properties, the question is how much will your property qualify for depreciation? There are advantages and disadvantages for both old and new types of properties and both do attract depreciation deductions, however, owners of newer properties will definitely receive higher depreciation deductions.
Let’s break down how depreciation works across the different property type, new builds versus established properties.
CHANGES TO LEGISLATION
In November 2017, one of the biggest changes to property depreciation legislation was made in more than fifteen years. Since then, there has been confusion about what property investors can and can’t claim. The new legislation states that if contracts were exchanged after 9th May 2017 on established properties, they can no longer claim depreciation on existing plant and equipment assets at the old rates, but are now only eligible for a flat 2.5% pa. These assets refer to the ones that are a part of the property’s structure and can easily be removed – such as carpers, air conditioning, blinds, etc. Whereas, investors who purchased a brand new property will be able to continue to claim full depreciation rates for plant and equipment as normal.
FIXTURES AND FITTINGS
Established homes for investors will typically have a lower written down value on fixtures and fittings, whereas newer properties are modernised and have brand new fixtures, fittings and high-tech gadget – resulting in large depreciable items compared to established homes. This in itself results in higher depreciation deductions because the starting value (the cost) of those items is higher relative to the assessed written down values of fixtures and fittings within an established home. So not only is the depreciation rates higher on new properties, but the cost base they are applied to is higher, resulting in a significantly larger depreciation claim.
THE RIGHT LOCATION
When it comes to property depreciation, choosing the right location is extremely important as tenants are attracted to modern homes and look for street appeal. Newer properties are generally built in developing suburbs which are in close proximity to schools, public transport and all the local amenities. Surrounded by other modern houses can attract tenants. As older properties usually have an outdated design, they have less appeal than the new ones to tenants and you don’t have a choice when it comes to location.
HOME WARRANTY INSURANCE FOR NEW BUILDS
Although an older property is generally more affordable than a new one, there could be many hidden problems, defects or structural issues that you find in the building and it can be very costly to do repairs and maintenance. This can be a headache for owners and tenants and could easily eat into your profit. With a newer property, there is less to worry about as the builder’s home warranty insurance will still be in place for any structural or major issues that arise a few months after the completion.
Whether you are interested in finding out more about depreciation and investment properties, iBuildNew has a dedicated team of independent experts to help you! Call 1800 184 284 or book a call with our team today!