Which property is best for depreciation?

In the world of property advisory, there are specialists across many fields.

Legal eagles know the ins and outs of conveyancing and property law.

Mortgage brokers can collate, filter and present you with the best possible options for sourcing finance. Understanding-Stamp-Duty

Buyers’ agents have well-forged networks and on-the-ground experience so as to secure the right property at an appropriate price.

And accountants can advise on ownership structures and financial implications.

But when it comes to assessing the effectiveness of tax depreciation, well – I don’t want to sound too self-important, but… quantity surveyors rock!

Interestingly, there are also plenty of commentators, advisors, pundits and touts who are pretty quick to let others know what they believe about which properties provide the best depreciation advantage.

Rather than rely on their advice, it’s important to instead look at the numbers presented by a highly qualified professional – in this case, me.

Tax depreciation and the application of regulator guidelines is a tricky business and, unfortunately, less scrupulous operators in the marketeering space have been known to bamboozled first-time investors.

property investors

They’ll use a whiteboard and marker to create unrealistic expectations of growth, tax advantage and wealth building – all with the hidden agenda of separating novice buyers from their hard-earned dollars by pressing them into buying new, generic product.

So, if you want real-deal advice on what different property types offer in terms of depreciation, we at MCG have the figures.

The process

Using a mix of ABS statistics and our own in-house data, we were able to run some interesting numbers.

We divided houses and units into 10 categories that help define their position in the tax depreciation race.

We then calculated the average first-year depreciation allowance across each of the property categories, and came up with this very handy table:

Investment Type First Year Deductions
Units
Pre-1987 $3,787.00
1987-1999 $6,666.00
2000-2009 $9,380.00
2010- Current but not brand new $9,932.00
Brand New $12,628.00
Houses
Pre-1987 $5,031.00
1987-1999 $8,452.00
2000-2009 $10,977.00
2010-Current but not brand new $12,099.00
Brand New $12,701.00

Three interesting findings

As can be seen, and may have been expected by some, brand new product offers the most potential for a large depreciation allowance.

But what might surprise you is that the difference between a new house and a new unit is minimal. Coins Stack Under The House Made With Red Measuring Tape

In many cases, if seeking an investment based on the best possible capital gain upside, savvy buyers would choose a detached house rather than a unit in a given suburb.

Historically, detached homes have better value gain potential than attached housing, often due to the land component.

So, don’t be fooled into thinking you must buy investors-style unit stock with high depreciation as the silver bullet to portfolio success.

In fact, you could buy a new home in the same location and enjoy similar depreciation benefits with better value upside potential.

Also of interest is that first-year depreciation benefits are similar for most existing (i.e. not new) units built after the year 2000 regardless of age.

So, for example, if you can secure a discounted purchase price on a circa 2001 unit in a given location compared to a similar size unit built in 2015, don’t be fooled into thinking the depreciation benefit in year one is better for the newer unit.Location

By our numbers, you will get pretty much the same depreciation benefit on both.

Finally, the figures reconfirmed to me that established housing, on average, still provides pretty handy depreciation benefits regardless of age – particularly after 1987. Again, don’t be trapped into thinking you need to buy new to reap rewards come tax time.

Even for older houses and units, a comprehensive schedule from a quantity surveyor will unearth plenty of opportunity to recoup some of those dollars come tax time.

So, don’t be fooled into thinking you must buy new to reap rewards, because the numbers tell a different story.

One crucial caveat

While the data was compelling, I’m at pains to say that making decision based purely on the advantages of average depreciation outcomes is foolish.

There are substantially more important considerations that need to be taken into account when building your personal portfolio.

Incomes, goals, age of retirement, changes in family status – all will play a huge part in how you, as an investor, grow your cache of real estate holdings – and almost all will be more crucial to property selection than the level of depreciation you can achieve.

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Mike Mortlock

About

Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at Visit www.mcgqs.com.au


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