For an investor who has settled on an investment property, especially a newly built one, it’s reassuring to know that there is a certain kind of safety net already attached in the form of tax deductions.
Once tax season hits, a claim can be made on the depreciation of the property, from its structure, down to the electrical appliances, and even the plant and equipment. These costs can then be shaved from your total taxable income, helping to manage your cash flow, and thus, the amount of tax you will ultimately pay.
Depreciation expert and director of Washington Brown, Tyron Hyde, recently sat down with Your Investment Property to tell us everything investors need to know about depreciation.
In light of the new depreciation laws that were passed in 2017, he says one of the most common questions he fields is: Is it still worthwhile lodging a depreciation claim on an older property?
“Whilst there were some changes to depreciation, the rules still enable you to claim the depreciation of a building regardless of its age. However, if you buy a second-hand investment property now, residential only, you can no longer claim the depreciation on the ovens, the dishwashers, etcetera,” Hyde shares.
“If it’s brand new, you can still claim both, but the moment you resell that residential property, that new investor cannot claim the depreciation on the ovens and dishwashers anymore.”
Although new depreciation laws have affected what can be claimed on older properties, Hyde says that ovens, dishwashers and appliances alike, only represent around 10% to 15% of a property’s overall construction costs. This leaves 85% of the property still eligible to be claimed.
There is a caveat to this: if the property happens to be built before 1987, and it hasn’t had any additional work or enhancements done to it, then Hyde says it may not be worthwhile to invest in a depreciation schedule, which is the document that stipulates how much you are eligible to claim on your property’s depreciated value over time. A depreciation schedule can only be supplied by a professional quantity surveyor, and will cost an investor anywhere between $440 and $770 (generally tax deductible).
Despite this, Hyde says that owning an unrenovated property that was built before 1987 is a very rare scenario, generally because a property that was built in 1970, for example, will be likely to have had some form of upgrade done to it in order for it to be tenantable.
“So, we’re finding that most properties are still depreciable, you just get less if it’s second hand now,” Hyde reveals.
In fact, according to Hyde, around 97% of the properties that his company has viewed, have proven to be worthy of a depreciation schedule.
In saying this, approximately how much can an investor expect to claim in depreciation on an older property?
“As an example, if you were to buy a property built between 1987 and the year 2000, you still may be able to claim $4,000 on the first year and $40,000 over the next ten years. And that’s assuming that there’s been no renovation on that property,” Hyde says.
“Now, if you were to buy a property built between 2000 and the year 2018, roughly you might be able to claim $6,000 in the first and maybe $60,000 over the next ten years.”
But it’s a different story when it comes to newly built properties, as Hyde shares.
“If you were to buy a brand new property, you may be able to claim $15,000 in the first year and maybe up to $90,000 over the first ten years, and the difference is that you can still claim depreciation on the plant equipment and the building allowance.”