Building More Value, Depreciation And New Houses

Building More Value, Depreciation And New Houses

Choosing to build a brand new home rather than buy an existing property provides a number of benefits for potential investors.

Generally these types of properties will be built in a developing suburb close in proximity to schools, transport and local services. Surrounded by other new homes, a new house is likely to have street appeal that will attract potential tenants and as a result provide excellent weekly rental returns for the property owner.

One benefit that often goes unconsidered by potential investors when investing in property however is the depreciation benefits available.

According to the Chief Executive Officer of BMT Tax Depreciation, Bradley Beer, research suggests that 80% of investors don’t maximise the depreciation deductions available from their properties.

Considered a non-cash deduction, investors don’t need to spend any money to be able to claim depreciation from their property. It is a deduction available for any wear and tear which occurs to the building structure and the plant and equipment assets contained in the property over time.

Depreciation relating to the building structure is claimed as a capital works deduction. Examples of items which can be claimed as capital works deductions include the walls, windows, doors and the roof of the property. Capital works deductions can be claimed at a rate of 2.5 per cent per year over forty years for properties in which construction commenced after the 15th of September 1987.

Plant and equipment depreciation on the other hand relates to the assets which can be easily removed from the property such as carpets, blinds, ovens, dishwashers, garbage bins and even shower curtains. These items depreciate based on an individual effective life as provided in legislation from the Australian Taxation Office.

While the owner of any income producing property is eligible to claim depreciation, those considering building a brand new property for investment purposes will usually receive higher depreciation deductions. There are two main reasons for this:

  • The owner of a brand new property will be eligible to claim the full deduction for the entire cost of the building structure over forty years. Owners of properties which are not brand new can only claim the remaining years available.
  • New houses usually contain plant and equipment assets which are higher in value. This increases the depreciation deductions which will be available for the owner.

Let’s take a look at some of the depreciation deductions the owner of a freshly built brand new house can expect to claim over the first five years of ownership.

As the table shows, the owner of a newly built house can claim between $8,300 and $10,700 in depreciation deductions in the first full financial year alone. Over five years, this cumulates to between $32,500 and $42,800 in deductions the owner can claim as a tax deduction.

Based on a tax rate of 37 per cent, investors will receive an average annual cash return of between $2,405 and $3,167 from a newly built house depending on its size and the assets contained.

Those considering building a brand new house for the purposes of an investment are recommended to seek advice from a specialist Quantity Surveyor prior to purchase.

 

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About

Brad has over 15 years experience in the property depreciation, building and construction industry and became the Director of BMT in 2002. As a result he has substantial knowledge and specialist experience in property tax depreciation and construction cost consulting. Brad is actively involved in educating property investors about the importance of tax depreciation and is regularly featured on the Sky News Business Channel.

2 thoughts on “Building More Value, Depreciation And New Houses

  1. Hello Ben,

    A good article, thanks for this.

    However , my understanding is when you sell the property, all those depreciations claimed will all be deducted from cost base, effectively you are paying back to ATO as the gain is higher, although the tax rate potentially be lower depending on each person’ situation .

    Thanks

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