Benefits of building a new investment property

BMT team — Wed, 19 Feb 2020 00:00:41 +0000

When you use a property for investment purposes, you want it to increase in value, or appreciate, over time. So why consider depreciation? While the value of the property hopefully rises during ownership, the building structure and assets within it will experience natural wear and tear. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for this natural wear and tear. These deductions can be claimed under two categories – capital works deductions and plant and equipment depreciation. Capital works deductions refer to the building’s structure and items considered to be permanently fixed to the property such as kitchen cupboards, doors and sinks. Residential homes in which construction commenced after 15 September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over forty years. Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. These assets have a limited effective life as set out by the ATO and can generally be depreciated over time. While almost all property investors will be able to claim depreciation, those who build a new property will usually claim higher deductions. Benefits of building a new investment property There are two main tax benefits to building a new investment property: Unlike an owner of second-hand real estate, an investor who builds a new property is not affected by legislation changes passed in November 2017. These changes eliminated the ability to claim a deduction for previously used plant and equipment assets found in second hand or previously owner-occupied residential investment properties. Owners of new property are still entitled to claim depreciation deductions for all eligible plant and equipment assets found within their property. The owner of a new property is eligible to claim a deduction for the entire cost of the building structure over forty years. Owners of existing property can only claim the remaining years available. The table below shows the first full financial year depreciation deductions and the five-year cumulative depreciation deductions for a new build and a second-hand property, both valued at $570,000. The newly built property is entitled to a first-year deduction of $10,516, while the second-hand property offers $6,738. Over the five years, the new property will allow the owner to claim $48,543 and the second hand will provide more than $28,000. While the second-hand property still offers lucrative deductions for the owner, there are clear benefits to owning a new investment property. Along with depreciation, there are several other benefits of a newly built investment property. A new home will attract an abundance of tenants seeking low maintenance, neat and tidy properties with urban convenience. As a result, the property is likely to provide consistent weekly rental returns and a low vacancy rate depending on the location and current market. When you are building an investment property from scratch, you’re also able to cater to the current market. Research what rental properties are performing well, considering the floor plan and key features that tenants are willing to pay a premium for. This could help you earn higher rental income and increase the value of the property over time. Depreciation case study: building an investment property Let’s analyse another example to highlight the importance of claiming depreciation as an investor. John builds a three-bedroom investment property for $600,000. From the property, he earns a rental income of $545 per week or a total income of $28,340 per annum. Expenses for the property such as interest, rates and management fees total $39,067. The following scenario shows John’s cash flow with and without depreciation. BMT Tax Depreciation found John $11,200 in the first financial year alone. Without depreciation he was paying an annual outlay of $6,758 per annum or $130 per week. By claiming depreciation, John reduced his outlay to $2,614 per annum or $50 per week. That’s a difference of $80 per week, or $4,160 for the first full financial year. To find out how much you could be claiming each year, Request a Quote or contact BMT on 1300 728 726 today.

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Property market update – February 2017

BMT team — Wed, 08 Feb 2017 23:05:06 +0000

Property values 2017 kicked off with continued growth in house prices according to CoreLogic’s Home Value Index. Combined capital city dwelling values increased by 0.7 per cent in January and as a result, values are 10.7 per cent higher than this time last year. Over the three months to January, it was Hobart which surprising led the capital cities in terms of the greatest increase in values. Tasmania’s capital saw dwelling values increase by 5.8 per cent, reaching a median dwelling price of $366,000. Sydney and Melbourne continue to be consistent performers in terms of dwelling price growth. Over the three months to January values rose by 2.7 and 2.4 per cent respectively in these cities. The current median dwelling price for Sydney is $850,000 while in Melbourne it sits at $640,000. Darwin was the only capital city where dwelling values experienced a fall, declining by 1.7 per cent during the month of January to a median dwelling price of $490,000. Residential property listings The latest data from SQM Research indicates that the number of residential property listings available fell during the month of January. According to the report, the biggest drop was experienced in Sydney and Melbourne, where listings declined 6.6 and 12.3 per cent during the month respectively. Nationally, there was a 3.0 per cent decrease in the number of residential properties listed. The only capital city which experienced an increase in listings over January was Darwin, with a 1.5 per cent increase. Auction clearance rates Despite the slowdown in residential property listings reported by SQM Research, the latest CoreLogic auction clearance rates indicate that the market will gather momentum after the seasonal holiday slowdown. Already there has been an increase in the number of auctions across the capital cities over the past week, with 867 auctions reported for the week ending the 5th of January compared with just 368 auctions during the previous week. From the 867 auctions tracked, CoreLogic reported a preliminary clearance rate of 70.8 per cent, down slight from the 71.6 per cent recorded for the last week of January. Rental rates Figures from the latest SQM Research Weekly Rental Index for the week ending the 4th of February show that over the month of January weekly rents for houses decreased by 1.4 per cent whilst weekly rents for units increased by 0.3 per cent. Of the capital cities, Canberra and Hobart led the way with the most significant increases in weekly rents for houses and units. Canberra experienced a 2.2 per cent increase in house rents and a 0.4 per cent increase in unit rents while Hobart saw a 2.3 per cent increase in house rents and a 0.7 per cent increase in unit rents over the month. Asking rents for Sydney houses increased by 0.2 per cent over January. However, the New South Wales capital city also saw a decline in asking rents for units of 0.2 per cent. No other capital cities experienced a decrease in weekly rents during the month. However, the asking rents for Darwin, Brisbane and Adelaide units experienced no changes when compared with the previous month. Rental vacancies The most noteworthy news regarding vacancy rates reported recently were figures reported by the Property Council of Australia. According to the Property Council’s Office Market Report, there was a slight lift in office vacancy rates from 10.5 to 10.4 per cent. The Australian Central Business District (CBD) office vacancy rate has remained steady over the six months to January 2017, falling from 11.0 per cent to 10.9 per cent. Demand for office space has been strong in all capital cities and particularly in Brisbane, where the Property Council reported that office space in the city CBD is now more than five times higher than historical levels. The Sunshine Coast and the Gold Coast office markets have also recorded sharp declines in vacancies, with the two cities now sitting at 6.9 and 12.2 per cent office vacancy respectively. Sydney and Melbourne CBD’s continue to demonstrate a strong office market performance, with vacancy rates of 6.2 and 6.4 per cent respectively. Building approvals The Australian Bureau of Statistics (ABS) released the latest buildings approvals data for December 2016 in February. According to the report there were 17,327 dwellings approved in December, a fall in approvals of 1.2 per cent when compared with the previous month in seasonally adjusted terms. The drop follows a 7.5 per cent jump in approvals reported in November and the numbers of dwellings approved is 11.4 per cent lower than the same time one year ago. Finance and interest rates At the first board meeting of the year by the Reserve Bank of Australia (RBA) it was decided to leave rates on hold at 1.5 per cent. The decision was widely anticipated after all seventy two Economists surveyed by Reuters indicated they expected the cash rate to stay put. Despite record low interest rates, property investors may continue to face difficulties with new loan applications and requests to refinance. Just yesterday Commonwealth Bank subsidiary, Bankwest, announced it has again tightened their lending policies for property investors.

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Benefits of building a new investment property

Property market update – February 2017