Tax Benefits In Brand New Properties

Published by Maverick Newsletter and shared with permission from BMT Tax Depreciation

BMT Tax Depreciation has prepared more than 600,000 depreciation schedules for property investors across the country, allowing them to access valuable insight into investors’ sentiment, goals and preferences.

Recently, a survey was sent to the BMT network of property investors and close to 1,000 responses were received. Of those surveyed, 42 per cent would choose a house as their next investment property type, 21 per cent favoured a unit or apartment, while 19 per cent showed interest in a townhouse. Only 9 per cent of investors would consider a house and land package, 6 per cent would consider commercial property and 3 per cent of investors were unsure about their next move.

It is also found that 63 per cent of investors would purchase a second-hand property as their next investment, only 33 per cent would consider purchasing a brand-new property, while just 4 per cent showed interest in buying land.

Second-hand property is clearly the top pick for investors. This is unsurprising, given existing property is generally affordable, available and provides good opportunity for growth. However, the results show that many property investors may not understand or be aware of the taxation benefits associated with brand-new property.

Depreciation improved on new property

Brand-new property often attracts an abundance of potential tenants seeking low maintenance, neat and tidy properties with urban convenience. As a result, the property is likely to provide consistent weekly rental returns and a low vacancy rate.

When building or buying a brand new investment property, there are significantly increased depreciation deductions on offer. The table following shows examples of the deductions available for a range of brand new property.

*First five years, calculated on a 37% tax rate.

Investors in brand new property are entitled to claim depreciation for the decline in value of the building’s structure as well as any plant and equipment assets inside.

Depreciation legislation changes passed in November 2017 eliminated the claims available on previously used plant and equipment assets found in second-hand residential property. BMT’s investor survey revealed that 50 per cent of property investors have little to no understanding of this legislation. The survey also showed most investors are targeting second-hand properties.

Investors in brand new property are not affected by the 2017 changes and can continue to depreciate all plant and equipment assets. However, if the property has been lived in before being sold, the new owner can no longer claim depreciation for these assets. The increased cash flow from depreciation is one of the main benefits of investing in brand-new property. Investors can also claim capital works depreciation for the entire cost of a building’s structure over forty years, rather than just claiming any remaining years at the time of purchase.

Six-month rule for developers

It’s important to note that there’s a special rule for developers of new residential property: the six-month depreciation rule.

Current legislation states that property sold with plant and equipment assets that have been used can’t be claimed by the new owner. However, developers who build a new residential property and cannot sell it immediately, have a six-month period to lease the property and sell it, without nullifying the depreciation for the incoming buyer. It’s important that the developer does not claim any depreciation deductions during the period in which the property is rented.

If the property is leased and sold within the six-month period and no depreciation deductions have been claimed, the buyer is entitled to claim full depreciation for the capital works and plant and equipment assets.

If the property is leased and then sold after the six-month period, the incoming buyer will not be eligible to claim depreciation for the plant and equipment assets. Although the assets are new, they will be classified as previously used under the 2017 legislation. For this reason, the developer’s activities and timings are critical in determining a buyer’s eligibility when claiming depreciation.

An investor who knows the depreciable value of a property before building or buying can calculate their exact after-tax cost or return, helping them to create a successful investment strategy.

Invest with confidence

An investor who knows the depreciable value of a property before building or buying can calculate their exact after-tax cost or return, helping them to create a successful investment strategy.

Depreciation estimates are also beneficial for property developers. Depreciation estimates can be passed on to potential buyers, highlighting the buyer’s increased future cash flow.