Have you heard about the new depreciation legislation? You may have been aware of the proposed legislation that was announced earlier this year in May as part of the Federal Budget announcement. These changes have now been legislated and effect all property investments after 9 May 2017. If you are planning on purchasing existing property for investment, make sure you are across all of these changes, as they have very real consequences.
Understanding changes to depreciation
Previously when you bought an investment property, whether that was an apartment, existing home or a new build home you were able to claim depreciation on “Plant and Equipment”, more commonly known as fixtures and fittings at the rate of 20-30% (depending on the individual item), and also claim a capital allowance deduction on the building component of the property at 2.5%. Plant and Equipment (P&E) are the assets on the property that are considered by the ATO to be easily removed from the property. These include things such as air conditioning units, curtains and blinds, carpets, appliances or security systems.
However, not all property investments will now be able to claim depreciation at the same rates on P&E, reducing the tax effectiveness of some property investments dramatically. Specifically, if you are purchasing an established home after 9 May 2017, you will no longer be able to claim depreciation at the rate of 20-30%, but rather only at the flat 2.5% on both P&E and the building component.
Thinking of building a new home or purchasing a house and land package as your next investment? Luckily for you, the rate at which you could previously claim P&E will not change, as under the new depreciation rules you can still claim at the old rates provided you are the “original purchaser” of the P&E, which for a new build that is deemed to be the case. Depending on the value of the property or house and land package, the difference in the depreciable amount can be tens of thousands each year, so property investors need to evaluate this very carefully moving forward to maximise your after-tax returns.
What this means for you
For anyone wishing to invest in established homes this is not a small change, so consider your options very carefully as not all property types are the same now. If you are planning on purchasing an established home as an investment, your typical depreciation deductions have just been reduced from around 25% on the P&E value to 2.5%, which is often a reduction of $10,000 to $20,000 pa in depreciation deductions. If you are yet to invest or thinking about adding to your property portfolio, make sure you consider an off-the-plan house and land package (new build) as you will still be eligible for the full depreciation claims as previously allowed by the ATO. Savvy investors will ensure they protect their after-tax position with this type of property investment, while still enjoying superior rental yields and strong capital growth enjoyed by new build investments.
It is no secret that if you are investing, the tax benefits are a huge reason for investing in property in the first place. Although property prices continue to grow and capital growth is very likely, having extra cash now from tax deductions is something that will put a lot of investors off from purchasing established homes in the years ahead.
Now what? Check Out investment house & land
Previously, no matter what type of property you purchased you would be able to claim back a high portion of your investment, making it financially viable on an after-tax basis. However, now that the lion share of the depreciation claim is no longer available on established property investments, you should seriously consider investing in a new house and land package.
With the prices of established homes continuing to grow in recent years, investing in an established home was getting out of reach for many investors anyway, with medium house prices climbing to $860K+ in Melbourne and $1.15m+ in Sydney. With investment house & land packages from $450K in Melbourne and $650K in Sydney, not only do they offer a more tax effective investment, they are also more affordable and offer greater upside in terms of capital growth given the lower base price.
If you are interested in still making the most of depreciation claims, have a chat with one of our consultants at iBuildNew. We can advise you further on how the new depreciation rules can work to your advantage, and we can intelligently match you and your investment objectives with the most suitable house and land package. All packages are fixed price, full turnkey and therefore tenant ready on day one. You can call us 7 days a week on 1800 184 284 or book a call online.