Old or New? Tax Depreciation benefits

investment-property-taxquantity-surveyor

 

 

 

 

 

Which property is best for you…Old or New?

I have lost count of the times I’ve been asked by property investors as to which properties offer the greatest amount of Tax Depreciation. As more first time investors are introduced to the property market these questions have become more specific, with investors asking us to assist them in the selection of a property. I’ll therefore provide a comparative analysis of properties that may assist you in the selection of a property that will suit your needs.

Not all investors have the same requirements. For instance, one investor may require a negatively geared situation where another requires instant cash flow or maximum capital gains or, if they’re really clever (or lucky,) a combination of all three.

As part of their purchasing criteria, it’s my belief that many investors are overlooking good properties because of their interpretation of the tax act or information that they are given.

In this article I’ll analyse three properties to determine what benefits are available. I’ve selected three because I feel that there are at least three distinct phases of a property’s life, which are:

  1. A new property
  2. A second hand property (1-15 years old)
  3. An old property pre 1985 (prior to building allowance being introduced).

I’ve chosen three properties in the same area. Although they’re similar it’s quite difficult to find three identical properties that were built in 2014, 1995 and 1978 for obvious reasons.

For the sake of this exercise, the criteria we looked at were: similar size, construction cost, purchase price and — most importantly — similar land value.

The houses I selected are all freestanding (detached) two level, brick veneer and tiled roof with similar construction cost and building standard.

The analysis shows clearly that the new property certainly provides the highest depreciation, returning 48.32% of the purchase price over the life of the property compared with 38.15% for the second hand property and 7.81% for the old property, which was unable to claim building allowance due to the fact that it was outside the eligible time frame set by the government. On closer examination of the results it’s interesting to note that over a 10 year period — a term that may be of interest to a number of investors — the second hand property was only slightly less in monetary terms… and remember the purchase price was initially the same. Actually, the second hand property is similar in depreciation until year 20, at which time the building allowance proportion of the property ceases.

For some investors this may warrant a closer look, especially in the areas where new stock is not available or where secondhand stock may offer higher capital gains over the 10-year period.

In general, old properties tend to be smaller in size and have fewer appointments. In some cases they have polished floors in place of carpets, less lights, single bathroom and shower and no motorised garage door. They often have window curtains and ceiling fans to many of the rooms. Old properties are often found close to the CBD with proximity to bus and train routes, which are popular with singles and young married couples with no children. They often offer high capital gains and, in some cases, require immediate maintenance.

Old properties do not qualify for building allowance. If they do, it’s because the property has recently undergone some renovations; e.g. it’s been re-roofed, re-stumped or a deck has been added which would qualify for capital allowances (building depreciation).

Many new/newer properties have high depreciation on the plant and articles simply because they have more plant, which is made up of items such as blinds and curtains as well as a highly appointed kitchen and laundry which may include a combination of whitegoods such as hot plates, oven, microwave, range hood, refrigerator, dishwasher, insinkerator, clothes washer and dryer.

One has only to be involved with the construction of a house to remember the costs associated with personal choice or (technically speaking) ‘prime cost’ items, the range of which is mind-boggling. As can be seen from the table below, the price range is as diverse as the cost. More developers and builders are now opting for higher standards of inclusions, which often include costly European models.

New properties have a definite advantage in that the fittings are generally of a high standard — a prerequisite in today’s discerning property market. New properties are typically located in the outer developing suburbs and are popular with young families with children. However, capital gains in these more outlying developments may be weaker than in near-city areas, as capital growth is attributable to land value, not the added value of improvements. The greater emphasis on inner city living has led to stronger capital growth for near city suburbs.

In summary, new properties generally have a distinct advantage over older properties in the areas of taxation benefits, but (depending on location and circumstances) may not offer quite the same level of capital gains. Whether capital gains or depreciation benefits are of greater importance depends on the investor’s particular financial circumstances and goals. A current Tax Depreciation Schedule / Quantity Surveyors Report will highlight the benefits in the property and what can be rightfully claimed.

 

This article appeared in the Australian Property Investor Magazine Author James Hannah see www.apimagazine.com.au and was presented to the investors club (Property Club) at their Perth Convention

a blog written by, James Hannah Tax Depreciation Specialist.