Building an investment property from scratch allows you to build the property best matched to your investment goals. But can you claim tax deductions while its under construction?
The short answer is – ‘it’s complicated’. But the way in which you build it can make a big difference to tax deductions down the track.
Benefits of building an investment property
Building an investment property requires time, patience and most of all the funds. But doing the hard work now can pay dividends in the future. There are some key benefits of building your own investment property.
1. Tenant appeal: While it’s your house, your future tenants will make it their home. A newer property will give them a fresh slate and make them more inclined to stay long term.
2. Rent return: A newer property will demand a higher rental rate compared to a similar, older property in the same area.
3. Energy efficiency: Older housing stock, especially those that were built before energy efficiency measures were in place, produce a huge amount of emissions. Newer properties are proven to be more environmentally friendly.
4. Depreciation deductions: New properties and high depreciation deductions go hand-in-hand – but more on this later.
Tax deductions while building an investment property
The Australian Taxation Office (ATO) is very clear about tax deductions while building an investment property.
Once a ‘substantial and permanent structure’ is built on vacant land, tax deductions still cannot be claimed until it can legally be occupied and is genuinely available for rent.
Ashton owns a residential block of land and he is planning on building an investment property on it. He has engaged an architect for the building, poured the concrete slab for the house and has fenced the land’s perimeter but it doesn’t hold any substantial or permanent structures. He purchased the land outright and is yet to obtain a loan for the construction of the building.
Since the property is also residential, deductions won’t be available until it is lawfully able to be occupied and rented or available for rent.
There are some instances where an expense can be claimed during construction as it is directly related to the intent of renting, such as interest on loans or landlord insurance . However most expenses that are made during the construction of a property will most likely will form part of the property’s cost base, construction cost or will not be claimable. Therefore, we recommend discussing this with an accountant for the most accurate advice.
It’s still important to keep tax deductions in mind when building a future investment property. The choices you make during the build will make a significant difference to the future depreciation deductions you can claim.
Why should depreciation be considered when building an investment?
Depreciation is the natural wear and tear of a property and its assets over time. Property investors can claim the depreciation of their rental properties as a tax deduction each financial year.
It’s well-known that new properties often produce significantly higher deductions than their older, second-hand counterparts. This is due to two key factors.
Firstly, 2017 legislation changes impact what plant and equipment assets can be claimed as depreciation from a property. Under the changes, pre-existing plant and equipment assets from a second-hand property purchased after 9 May 2017 are ineligible for depreciation. Obviously, newly built properties aren’t impacted by these if you don’t live in the property before renting it out.
The second factor is around capital works deductions. These deductions are available on a property’s structure and fixed assets like door handles and benchtops. Any residential property constructed after 15 September 1987 will have capital works deductions available.
Order an estimate while you’re waiting on the build
If you have most of the details of the property now but are still waiting for it to be built, you can still get a good idea of the depreciation deductions you can claim. BMT Tax Depreciation provide obligation-free depreciation estimates for any type of property in any stage of construction if the baseline details are available. Contact BMT today on 1300 728 726 or Request a Quote.