The Property Depreciation Shock!!

We find people think they know the current depreciation tax laws, but most receive one massive shock!  Depreciation legislation for tax benefits has changed significantly and the difference between buying the right property and the wrong property could see you have more than $100,000 in cashflow difference over the ownership period.

We previously received the benefit of depreciation on plant & equipment (fixtures & fittings) plus the first 40 years of the properties construction price. This means there are now three substantial ways people considering property investment can get this wrong:

1. Buying an established property will mean that you miss out on all the plant & equipment depreciation, which may be from $15,000 or up to $40,000 on the range of properties. This may be the smaller of the two pending on your choice of property as some properties offer better depreciation and often these can come with better rental yields associated to quality or size or dual income property.

If you were to buy a new property, the full tax benefits remain, as this is a further incentive to supply housing for our growing population numbers and therefore the $15,000 to $40,000 would be reinstated in the tax benefit equation for the property investor.

2. On buying a residential investment property the ability to depreciate the original building cost is one that is often confused. We have found some that thought it was the full purchase price whilst others thought the value to build the property today, both are wrong. This building depreciation is the real build cost of the property with a 40 year allowance of 2.5% of the build cost each year , meaning 100% claimed. IE If a property was built say in 1995 at a median cost of say $60,000, then the 2.5% is equal to $1,500. If a property today cost $300,000 this would equate to $7,500 per annum towards a tax deprecation claim. On the new property it would have the added faster write off of Plant & Equipment which could see a claim moving up to $16,000 plus per year.

The second component that may come along with buying an older established property that needs consideration is the ongoing maintenance, as you are buying a property that will require a maintenance program to commence in your year one of ownership. This may be a further $2,000 to $6,000 per year pending on the style and type of property. If you are contibuting to a sinking fund within a planned owners corporation this will cover much of these funds.

If a new property is purchased the repairs and maintenance program normally doesn't really commence in any way until closer to year 10, in some cases from year 7 onwards. This means the investor has 7 ro 10 years of rental growth before any funds are required. During this period the growth in rental effectively covers maintenance once it starts.      

 
3. The last but most critical element today is that a qualified Quantitiy Surveyor must complete your depreciation schedule that is submitted for taxation. I know 30 years ago when I purchased my first property, the accountant and I sat in his office and listed the depreciation elements within the flat I had purchased, today this is 100% not acceptable. We have panels of Quantitiy Surveyors as industry professionals and can direct you to or many situation we can negotiate that this is a supplied item on your purchase. 

Getting your 3 deprecation factors right will prevent, "Property Depreciation Shock".