It is not uncommon for a property investor to consider purchasing an older residential property.
For some it is just more financially viable, particularly for first time investors who may not have the same finances available as a more seasoned property investor.
When an investor decides to purchase any property, it is important that they contact a specialist Quantity Surveyor to discuss the depreciation deductions that are available.
This is particularly important for investors who purchase older residential properties, as it is the owners of these properties who tend to miss out on depreciation deductions the most.
There are a number of reasons for this
Firstly, many investors think that older investment properties are ineligible for depreciation deductions.
This misunderstanding arises in part due to legislation the Australian Taxation Office (ATO) places on the capital works component.
Introduced on the 18th of July 1985, the ATO initially allowed the owners of properties in which construction commenced after the 18th of July 1985 to claim capital works allowance (or building write-off) for the wear and tear of the structural elements of a building and fixed items at a rate of 4% over twenty five years.
However, on the 16th of September 1987 the legislation changed, meaning that the owners or properties in which construction commenced after this new date could only claim capital works at a rate of 2.5% over forty years.
As the twenty five years for properties constructed between the 18th of July 1985 and the 16th of September 1987 have now passed, the 4% capital works deduction is no longer available for the owners of these properties. This does not mean that depreciation for the owners of these properties no longer applies.
On the contrary, investor’s can still claim substantial depreciation deductions from the plant and equipment assets contained in an older property
Depreciation of plant and equipment is not limited by age; it is the condition and the quality of each item which contributes to the depreciable amount.
On average, 15% of the total construction cost of a residential property is made up of plant and equipment.
This includes items such as carpet and hot water systems, as well as less obvious items such as garbage bins, mechanical exhaust and door closers.
These plant and equipment items are rarely the same age as the building, usually being replaced or updated over time.
The greater amount of plant and equipment items identified, the higher the depreciation claim.
Another important part of maximising claims on older properties is identifying any additional works, extensions or internal refurbishments which have taken place over the life of the property.
Even if the work were completed by a previous owner, any structural addition completed after the ATO qualifying dates can be claimed as capital works, further increasing deductions.
A specialist Quantity Surveyor will be able to identify and estimate costs of all additional works, extensions or internal refurbishments on older properties.
The table below demonstrates the depreciation deductions for an old, a new and a recently constructed investment property.
In all three examples the properties were purchased for $460,000.
As the table shows, although the claim for the owner of a property constructed in 2012 is higher, the owner of an older property constructed in 1974 (with minor renovations) will still receive a substantial deduction of $7,127 in the first year of ownership.
For investors depreciation makes a real difference no matter what the age of the property in reducing their taxable income and making a property cash flow positive sooner.
If you’re considering investing in an older property, make sure depreciation is not overlooked and seek the advice of a specialist Quantity Surveyor and an Accountant.