Investment Property: Non-cash deductions
Deciding whether to buy old or new is a challenge for investors.
Many assume that buying an older house and renovating will be the cheaper option, but this is not always the case.
Of course, there are advantages to older houses. They are often on bigger blocks of land, they have character and are in established neighbourhoods usually with wider roads and completed landscaping.
But there are also many advantages to buying new!
What many people aren’t aware of, or don’t take into consideration when buying new, is the government’s tax incentives.
Non-cash deductions and other returns can be claimed by people who intend to MAKE MONEY from their property.
“Research shows that 80% of Property Investors are failing to take full advantage of property depreciation and are missing out on thousands of dollars in their pockets,” says Director of BMT Tax Depreciation, Bradley Beer.
Property Investment: How to, asked our Property Consultant, David Ferguson, to explain what non-cash deductions are and why we can claim more on new property.
What are non-cash deductions?
“They’re based on depreciation, or rather a tax on the depreciation of the home. When the home is built, a valuer will report the overall value of the dwelling then, each year, based on the value, you will get a return to substitute the deprecitation of the home.”
How long do you receive the return for?
A new house will have a tax deductable period of 40 years based on the value of the building while a second-hand place will only have a tax-deductible time frame based on the remainder of the 40 years. You will also receive tax deductions on the fixtures and fittings for 8 years.
“These non-cash deductions mean that the chunk of depreciation tax you can claim each year is much bigger on a new place. It’s a great incentive for you to buy new!”
Is it worth it? How much am I paying in taxes just to see a small return?
“You don’t actually have to part with money to get the tax deduction.
The 40 years is the time frame that they deduct the tax each year, it’s a percentage of what the property was built for not on your own expenses so you are not actually handing money to the government, you are just getting a return on the money you invested into the value of the home.
It’s not a percentage of what the value of the property is now, it’s a percentage of what it was bought for earlier on so for 40 years after being built, it will continue to return based on it’s original value”.
Why is the non-cash deduction worth it for the Government?
“The government is really trying to get you to buy something which is new for two reasons. Firstly, by building new you are providing more accommodation for the desperate housing shortage we have, and secondly, they are wanting to ensure people are building an asset base to help fund their retirement phase”.
Why is the non-cash deduction worth it for you?
“The challenge is that if people step into an investment and they bought an old place say, in their 30’s, by the time they come into retirement the house is that much older and is probably going to need a decent amount of work. In some cases even a knock-down re-build.
On the other hand, if you bought a brand new place, you can depreciate that off that 40 year span of time. Because its depreciation is recognised at the time of construction, you receive a fairly sizeable chuck of the value over a much larger time span”.
Can I claim non-cash deductions on a newly renovated property?
“If you have done renovations, the non-cash deductions are based not on the construction of the original dwelling, but instead on the fixtures and fittings which you can claim back over an eight year span of time.
So it is only within those first eight years that the renovated property is actually servicing you with a cash advantage”.
“You don’t actually have to part with money to get the tax deduction,” David Ferguson.
Written by Jordan Cox and James Parnwell
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