DEPRECIATION – An important consideration on the new vs existing property debate.
Did you know, depreciation is usually the second largest tax deduction available to investors after interest payments?
While many investors consider location, purchase price and tenanting ability when contemplating a purchase, they often overlook depreciation as an important factor. Depreciation can aid cash flow resulting in the investor having thousands of additional dollars each financial year. Perhaps the biggest factor in getting the most depreciation benefit is the age of the property. Whilst both new and older properties will attract some depreciation deductions, the Australian Government has now legislated amendments to plant and equipment (division 40) deductions on second-hand residential properties.
Put simply, if you purchases a second hand property today, you will be unable to claim deductions for Plant and Equipment (items like dishwashers, air conditioners, blinds, floor coverings). You will still be able to claim capital works deductions for the structural component of a property however these are at the lower rate of 2.5% over 40 years.
Brand new properties have the benefit of being able to claim plant and equipment deductions from the start, which could result in tens of thousands of dollars in tax deductions (over $30,000 difference in the example below) as opposed to a second hand property of the same value.
This makes the choice between a new property and a second hand property even more important as the deduction available can drastically alter the cash flow and therefore the ability to service your investment.