Depreciation on Investment Property

Depreciation of assets in off-the-plan properties is higher than second hand property


Investors who are looking to purchase a new property often look at buying off-the plan over an existing property – even if that existing property is new as recent changes to Depreciation by the ATO exclude a range of depriciable items on property which is now second hand.

Buying off-the-plan essentially means you are entering into a contract to purchase a property prior to, or during the construction phase of a property or a development. One big benefit of purchasing off-the-plan that investors often fail to consider is the property depreciation benefits available are significant.

The Australian Taxation Office allows the owner of any income producing property to claim depreciation due to the wear and tear of the building structure and the plant and equipment assets contained within the property*. Depreciation is considered a non-cash deduction, meaning investors do not need to spend any money to be able to claim it.

There are significant depreciation deductions available to the owner of a property purchased off the plan. It is important to note however that the property must be completed and be generating an income in order to claim depreciation deductions.

A completed property (purchased off-the-plan) will typically attract between $8,000 and $14,000 in depreciation deductions in the first full financial year, so it is fair to say that the new owner can make significant savings and increase their available cash flow by claiming depreciation for the property once it is income producing. This depreciation is allowed annually based on your Depreciation Schedule you have had effected on the investment property for which you are claiming depreciation on.

Newly built properties constructed off-the-plan will contain new fixtures and fittings, therefore the depreciable value of these items will be higher than older properties. The owners are also eligible to claim the maximum capital works deductions for the building structure, which means more deductions are available to claim over the life of the depreciation of the property (40 years). Where as an older property you will only be able to claim this on the balance of the 40 years and being built a few years back will have a lower capital works value compared to a new built property and thus even lower depreciation claims.

When it comes to the fixtures and fittings in an off the plan property, investors should be aware that not all assets are created equal. In most cases, those assets with a higher starting cost will generate higher depreciation deductions. For this reason, investors may want to consider the brand and price range of assets in an off the plan property.

It is logical that assets with a higher starting cost generate higher deductions than those with a lower base cost, both in the first full financial year and over the first five years combined on fixtures and fittings. As an example, a high range oven costing $5,150 will receive $858.51 in first year deductions and $3,080.74 in the first five years, while a low range oven purchased for $1,425 will get $237.55 in first year deductions and $1,183.42 over the first five years. This is a difference of $1897.32 in the first five years.

If this is the difference from just one asset, it’s understandable why the investor would want give due thought to all the plant and equipment assets installed, as they add up to substantial depreciation differences. However under new tax regime you may not be able to claim any deductions on second hand properties plant and equipment meaning more cash flow out of your pocket than if it were a brand new first time owned property.

It is recommended that investors consult with their Accountant to seek advice when purchasing a property off-the-plan and also speak with a reputable Quantity Surveyor to get an estimate of the likely depreciation deductions available for the property. A specialist Quantity Surveyor will liaise with the Property Developer to request information about the property; this information is used to provide a detailed estimate of the depreciation deductions that will become available once the property has been completed and is income producing.

By obtaining this information, the owner will have a far more comprehensive idea of the end cost involved in holding the property. The additional cash flow created from a depreciation claim can be put towards future loan repayments or to help save for future investment property purchases.

For a detailed estimate of the depreciation available for any investment property, contact the expert who can provide you with a written depreciation schedule which you will present to your accountant when claiming your tax deductions on your investment property.

The higher the depreciation the more tax you will not have to pay the tax man; over the period of ownership of your investment property the difference between a first time owned property (new or off the plan) versus a second hand property (even if new but previously owned) is significant and the tax you have saved over this period could equate to a substantial amount especially if you invest the tax rebate into this property or into your existing home loan thus compounding your savings over the life of the claims.

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