Owners of income-producing properties are eligible to claim significant taxation benefits each financial year, including property depreciation deductions. Property depreciation is a non-cash deduction, meaning an investor doesn’t have to spend money to be eligible to claim it.
The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. These deductions can be claimed under two categories – capital works deductions and plant and equipment depreciation. You might have also heard these being called Division 43 and Division 40.
When deciding what type of property to invest in, investors should be aware of the lucrative benefits of investing in brand-new investment properties:
Increased tenant interest and low maintenance costs
When an investor buys a brand-new investment property, it’s usually ready to be advertised to potential tenants straight away.
Modern, brand-new properties tend to attract high tenant interest, strong rental returns and low vacancy rates depending on the market. Given that the structure and any relevant fixtures and fittings are also new, they are often more durable, requiring less maintenance and repairs. You also know the history of the property’s structure, fixtures, and fittings. This is rarely the case when buying a second hand property.
Newer properties usually hold higher values than similar, second-hand properties in the same area. While there’s no knowing how the property market will perform, trends have proven that property values generally increase over time.
The common goals of owning an investment property are to make extra income, build equity and increase capital growth. Investors who own brand-new properties hold a head-start on the capital growth curve. Additionally, the high rental yields new properties can produce maximised cash flow and returns during ownership.
Higher deprecation benefits
Investors of brand new investment properties are eligible to claim all deductions available on the structure and any fixed or mechanical assets.
Legislation changes made in 2017 mean owners of second hand investment properties can’t claim depreciation on previously used plant and equipment assets. Brand new properties aren’t affected by the 2017 legislation changes, allowing investors to claim all available deductions.
When a property is new it also allows the investor to claim all capital works deductions for the lifetime of the property (forty years), rather than just a part its lifetime. BMT Tax Depreciation find owners of brand new investment properties an average of almost $12,000 in first full financial year deductions.
Brand-new property case study
An investor owns a new three-bedroom home purchased for $600,000 with a rental income of $545 per week or a total income of $28,340 per annum.
Expenses for the property such as interest, rates and management fees totalled $39,067.
The following scenario shows this investor’s cash flow with and without depreciation.
As the table shows, the investor enjoyed a $11,200 depreciation claim in the first financial year alone.
Without depreciation, they were paying an annual outlay of $6,758 per annum or $130 per week. By claiming depreciation, the investor reduced their outlay to $2,614 per annum or $50 per week. This was a difference of $80 per week in the investor’s pocket, or $4,144 for the first full financial year.
Bradley Beer is the CEO of BMT Tax Depreciation—a leading Australian quantity surveying firm trusted by Blue Wealth Property clients. Bradley joined BMT Tax Depreciation in 1998 as a quantity surveyor and became CEO in 2015. He is a member of the Australian Institute of Quantity Surveyors, the Royal institute of Chartered Surveyors, and the Auctioneers and Valuers Association of Australia. To learn more about property depreciation, contact BMT Tax Depreciation today on 1300 728 726 or request a quote.