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Unraveling the Tax Depreciation Dilemma: Brand New vs. 10-Year-Old Properties

Embarking on your property investment journey involves many critical decisions, one of which is whether to invest in a brand-new property or an older one. While multiple factors play into this choice, a vital element to consider is tax depreciation benefits. In this article, we'll compare a newly constructed $700,000 property with a 10-year-old property of equal value, keeping in mind an investor who earns $100,000 per year.

The Allure of the New

Brand-new properties can be incredibly attractive in terms of tax depreciation. Australian tax laws allow property investors to claim two types of depreciation deductions: Division 43 (capital works deductions) and Division 40 (plant and equipment depreciation).

In the case of new properties, you can maximize both these deductions. Division 43 allows you to claim a consistent 2.5% per year on the construction costs over 40 years. If we consider the building cost as roughly 40% of the total property value for new houses, you're looking at a potential annual deduction of $7,000 ($700,000 x 40% x 2.5%).

Division 40, often referred to as plant and equipment depreciation, covers the deductions for the decline in value of depreciating assets installed in the property. These assets encompass everything from carpets and appliances to window coverings and air conditioning units.

In a new property valued at $700,000, the building component might be around 40% of the total property value, i.e., $280,000. Assuming that plant and equipment constitute about 15-20% of this building cost, we're looking at a value between $42,000 and $56,000 for these depreciable assets.

Now, here's where it gets interesting. Most of these items depreciate over an effective life of 5-10 years under the diminishing value method, which means higher deductions during the initial years. For example, a $2,000 fridge with an effective life of 10 years could provide a $400 deduction in the first year, and so on.

The Charm of the 10-Year-Old Property

A 10-year-old property might seem to provide fewer depreciation benefits at first glance. After all, the plant and equipment items have already experienced a decade of depreciation, lowering their remaining claimable value.

However, this doesn't render older properties devoid of benefits. For one, the capital works deductions remain valid. You can still claim the remaining 30 years of the original 40-year entitlement, translating into a significant deduction each year.

In terms of Division 40, despite a decade of depreciation, there may still be some residual value to claim. But since 2017, specific investors can no longer claim deductions for previously used plant and equipment in residential properties. A depreciation schedule prepared by a quantity surveyor can help determine any remaining deductions.

The Bottom Line

Choosing between a new and a 10-year-old property isn't just about tax depreciation. While new properties might offer more significant deductions initially, they often carry a premium price tag and slower capital growth.

In contrast, older properties might offer fewer depreciation benefits but are often available below their intrinsic value and present opportunities for value-adding renovations. These factors can lead to higher capital growth, generally outweighing the benefits of tax deductions in the long term.

In our experience, while tax benefits should inform your investment decision, they shouldn't be the sole driving force. Always consider factors like capital growth potential, rental yield, location, and the property's appeal to your target tenant demographic.

Remember, everyone's situation is unique. So, it's worth consulting with a property investment professional and a tax advisor to determine the best strategy for you.

Please note: This article is intended to provide general information and does not constitute financial or taxation advice. As tax laws and regulations may change, always consult with a certified tax professional for personalized advice.


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