Property Depreciation On A New Building - What Is It And What Are The Benefits For Investors
Property investors who buy brand new properties are entitled to claim full depreciation on both the ‘Plant and Equipment’ and the ‘Capital Works’ allowance, which often makes them very appealing to investors.
But what exactly is depreciation and what are the differences between buying a new and old property?
What is property depreciation?
As a property investor you have the ability to claim depreciation on the value of your assets. Depreciation from an accounting perspective, is the decrease in the value of assets, or another way to explain this is, the decrease in the value of something that can be sold or converted into cash.
So just as a car depreciates in value over time, so too does a building and many of the interior features of the property such as curtains, blinds, appliances etc and it is the change in value that property investors are entitled to claim at tax time.
There are two types of depreciation you can claim on an investment property:
- Capital Works allowance or building write off (Division 43) - this includes deductions available to owners for the structural elements of the building and the items within the property that are considered irremovable. It includes foundations, walls, ceilings, roof, tiles, toilets, built in storage, windows, doors etc
- Plant and Equipment (Division 40) - this includes items within the building that can be removed such as curtains and blinds, kitchen appliances, air conditioning, carpets and flooring, dishwashers, hot water units etc. The ATO has classified each of these assets with an effective life span in years, based on how long it can be used to produce income.
A key difference between the two divisions is the rate of depreciation. For example, according to tax depreciation quantity surveyors, BMT, “building structure (Division 43) can be claimed at a rate of 2.5% over 20 years. Carpet (Division 40), in a new residential property depreciates at a rate of 20% over 10 years (using the diminishing value method)”.
As an investor ensuring the various assets of the investment property are classified correctly is important, however sometimes this can get confusing. For example, an air conditioning unit in a property is considered to be ‘Plant and Equipment’ and therefore falls into Division 40 and is eligible for a 20% depreciation rate. However, the ducting for the air conditioner is classified under Capital Works or Division 43 and only eligible for 2.5% depreciation.
How do you obtain a ‘Statement Of Allowances’?
You will need to engage a qualified ‘Quantity Surveyor’ to prepare a detailed report specific to the property purchased. The Quantity Surveyor will then conduct an in-depth analysis of the building and construction items, fixtures and fittings that can be tabled into a report for your accountant to claim at the end of the Financial Year. Getting this right can mean the difference of thousands of dollars in the property investors pockets.
What is the difference between a depreciation allowance when buying a brand-new property vs an old one?
Buying a brand-new property as an investment
If you bought a brand-new property after 9 May 2017, you are most likely to be eligible to claim depreciation on both the building and the plant and equipment within it. From an investor standpoint it provides you with a higher total base tax deduction entitlement as you are able to combine the value of the building, along with its fixtures and fittings.
This benefit is often very appealing to investors.
Buying an older property as an investment
From a depreciation perspective, for older properties, investors can normally only claim depreciation on Capital Works (Division 43). As mentioned above this includes structural elements of the building and the items within the property that are considered irremovable such as foundations, walls, ceilings, roof, tiles, toilets, built in storage, windows, doors etc.
You can however still claim depreciation for any brand-new plant and equipment assets you purchase and install in the property once it is income producing.
If however, the property you bought has been substantially renovated by the previous owner for the purposes of selling, you will most likely be able to claim depreciation on the new ‘Plant and Equipment’ assets, along with any qualifying ‘Capital Works’ deductions. Talk to your accountant about this further if you feel it applies to your property.
In addition to depreciation what other expenses can I claim?
According to the ATO, you can generally claim an immediate deduction against your current year’s income for your expenses related to the management and maintenance of the property, including interest on loans.
If your property is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, such as salary and wages and business income. However, every investment property is different, and it is imperative that you talk to you accountant about your property and what you are entitled to claim.
In addition to depreciation, here is a look at some of the expenses you may be entitled to claim on your investment property:
- Advertising for tenants
- Body corporate fees and charges
- Council rates
- Water charges
- Land tax
- Gardening and lawn mowing
- Pest control
- Insurance (building, contents, public liability)
- Interest expenses - the property must be rented out or genuinely available for rent in the income year you claim a deduction
- Pre-paid expenses
- Property agent’s fees and commission
- Income protection insurance
- Repairs and maintenance
- Some legal expenses
A final word
While all residential property investors are able to claim depreciation, investors who buy new properties will usually be able to claim higher deductions and this can be very appealing. Always seek a professional opinion by discussing your personal circumstances with your accountant or financial advisor.
If you’d like to find out more about the benefits of buying a brand-new property, connect with our projects team here.
McGrath Limited and its subsidiaries, together with their directors, officers, employees and agents have used their best endeavours to ensure the information passed on in this document is accurate. However, you must make your own enquiries in relation to the information contained in this document and seek advice from your financial advisor, broker or accountant to ascertain its application to your circumstances.
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