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How Changes To Depreciation Will Affect Investors

Changes to how depreciation can be claimed on residential properties, following the release of the 2017-18 federal budget, will cost some investors thousands of dollars, while potentially having a negative effect on housing affordability despite being designed to do the exact opposite, experts warn.

The new measures, which were announced on May 9, read as follows:  tax depreciation

“From July 1, 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties.

Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.”

This means property investors can only claim depreciation on dishwashers, fans, and other fixtures they’ve paid for themselves, presumably by purchasing the property brand new.

Previously, investors who bought established properties could continue to claim depreciation on those items going forward.  

While these changes may not sound like a big deal, it could prove costly in the short term and could set off a chain of events that would culminate in housing affordability suffering even more than it already is, according to Tyron Hyde, director of Washington Brown. 

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“Investors need these deductions early on. Not so much down the line, because the value has gone up and they’ve increased the rent,” Hyde said.

He calculated the effects on the hip pocket and found that for an $800,000 apartment in a development released this year, an investor’s savings on depreciation over the next decade would amount to around $110,000.

This is down from the $140,000 the investor would have made prior to the introduction of the new measures.

However, if the $800,000 property was built in 1997, an investor who buys it now can claim $61,000 over the next 10 years.

Previously, the investor could have claimed $100,000.

On the other hand, the buyer of a $600,000 apartment built in 1986 can now claim absolutely nothing over the next 10 years.

Previously, the buyer could have claimed $17,000. Property-Investment

“You might see investors now holding onto a property for longer, because they know they won’t get depreciation on their next property,” Hyde said, adding that the flow-on effect would further exacerbate the housing supply shortage crippling the southeastern capitals.

“They should be looking at the supply-side issue. Supply is the real problem [for housing affordability] and this will do nothing to help that problem.”

The changes have been grandfathered, meaning they will only apply to investors who purchase property after May 9, 2017.

The government expects the changes to save the federal budget about $260m.



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'How Changes To Depreciation Will Affect Investors' have 1 comment

  1. Avatar for Property Update

    May 31, 2017 @ 10:34 am Sean

    I think if you look at the average amount of negative gearing claimed by taxpayers and the average amount of depreciation claimed, what we see is that the government has actually implemented a defacto ban on negative gearing for most properties because if you removed the depreciation allowances in most cases you will find that the property comes a lot closer to being positively geared or neutrally geared.

    If depreciation is allowed on new properties, which seems to be the case, it means that the government has essentially copied the ALP’s policy from the last election at least for the vast majority of cases. Which is interesting considering how hard they campaigned against it.

    I think one impact which most commentators have overlooked is that this has a very big effect on the buy – renovate – sell strategy. While new properties will probably keep the depreciation, renovated ones clearly won’t. So if you are looking to renovate to sell to another investor, your market has just shrunk significantly. Selling in the owner occupied market will not be affected, but if investors can no longer claim the deduction for depreciation, they will factor that into their costs and either offer less or walk away. So that will affect prices.

    The change potentially also makes older properties potentially more attractive. Paying $20,000 more for an almost new home compared with an older one now makes little sense for an investor. A better strategy becomes to buy something which has very old plant and equipment at a cheaper price and spend that $20,000 (or whatever) to upgrade the plant and equipment, increase your rent and get the depreciation.

    Just as depreciation spawned an industry of quantity surveyors, I think someone with the know-how could very easily start up a business which will strip almost new properties of their plant and equipment, and install new or second hand P&E (possibly from previously stripped properties) to allow people to get deductions. It does appear that second hand goods are still depreciable as long as the owner bought them. So what is to stop you and I from buying properties, you sell me your P&E and I sell you mine. And we can both get deductions. The only question is whether it is worth the trouble!

    My final thought is that the fear that this situation creates does present opportunities for buyers, at least for the next few months. For any property that was advertised prior to the budget, investors should be going in hard and offering a good $25-$25k less than we would have previously and making it clear to agents that, at least for investors, these properties are clearly less valuable than they were a few weeks ago as a direct result of the budget. A bit of a price drop may actually be a good thing as it will show the public what is likely to happen if negative gearing is eroded further.

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