Maximise Your Tax Deductions - Buy Brand New
People often ask me questions like, “I should buy a new investment property because it’s better for tax right?” The answer is yes and at the same time, no. Buying a brand-new property because of the available deductions is not a sophisticated strategy. Accountants tell me the same thing, people say they need an investment property because they’re paying too much tax. Makes you think whether they even care about capital growth!
All that aside, here are two all but bankable truths:
- Units provide better deductions than houses;
- Newer properties provide better deductions than older ones.
Of course, if the unit is tiny and we’re talking about an 800sqm residence, this won't apply. Nor will it, for an older heritage property that has had a back to bones renovation with a mega budget. In general terms though, buying a new property will give you better depreciation deductions, here’s why.
On the 9th of May 2017, the depreciation game changed. If you exchange contracts on a property after that date, you’ll only be able to claim deductions on the plant and equipment deductions if the property is new. All other properties purchased before then are grandfathered. Plant and equipment items are typical loose assets but include things like ovens, cooktops, blinds, carpet, air conditioning, hot water systems and the like.
So, we recently took an in-depth look at around 100 of our residential schedules and found that in the first full year of claim, 59% of the deductions were attributable to plant and equipment items. That number drops as time goes on due to the high depreciation rates but the impact is a big one.
On top of this, buying new means you’re taking over 100% of the depreciable value of the property, whereas if you buy a property that’s already 10 years old, you will have lost ten years worth of depreciation deductions, which would mean at least 25% of the total deductions are gone.
For all these reasons, if you’re considering buying new, you’ll certainly benefit from the perfect storm of elements to maximise your depreciation claims. If it’s an apartment you’re looking at, you’ll also have the bonus of a share of the depreciation on the common areas, and the common area assets like lifts, fire services, lighting, intercoms and much more.