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While property investors enjoy significant tax breaks, not all types of properties are treated equally by the tax office. We speak to a depreciation expert to find out why a brand-new dual income home is the best investment, tax wise.
If you're investing in Australian real estate, you probably know about depreciation deductions - they’re one of the biggest tax advantages property investors can claim. But did you know that the type and age of your property can make a huge difference in how much you can deduct? Depreciation expert and Washington Brown CEO, Tyron Hyde, breaks it down.
When it comes to your investment property, I like to describe deprecation - claiming the wear and tear of your asset against your taxable income – as the icing on the cake. But some assets offer sweeter deductions than others, which can impact your cash flow.
The age of your investment property plays a massive role in how much depreciation you can claim. We explain why new properties come out on top.
Due to tax law changes in 2017, you can no longer claim depreciation on existing plant and equipment items in a second-hand property. That means no deductions on an existing oven, air conditioning unit, blinds, or carpet. Even if the items are only one day old and you are the second owner of that property, they are still classed as second-hand. However,if you invest in brand-new property, you can claim depreciation on everythingfrom day one.
Depreciation on a building’s structure is claimed over 40 years at 2.5% per year. If you buy a brand-new property, you get the full 40 years of deductions. Buy an older property, and you’re left withwhatever’s remaining - significantly reducing your long-term claims. So, if theproperty is 15 years old, you’ll have 25 years of deductions remaining.
Building costs are constantly rising due to inflation and market conditions. Since depreciation is calculated based on the original construction cost, newer properties (built at today’s higher prices) offer bigger deductions than older properties built at lower historical costs.
Dual income properties, also known as ‘dual key’ or ‘dual occupancy’ homes, are becoming increasingly popular among investors. They are designed to maximise rental return by generating two rental incomes from a single property. DPN offers a range of layouts but they typically comprise of a 2 bedroom, 1 bathroom and a 3 or 4 bedroom plus 2 bathroom dwelling on the same parcel of land.
Let’s compare the costs of owning a brand-new $850k dual income versus a $850k 5-year-old house. Both properties generate the same rental income of $1,000 per week and have the same mortgage terms—a $680,000 loan at 6% interest per annum.
Running costs for both are assumed to be 1.5% of the purchase price per year.
A dual income is essentially two homes under oneroof, and that comes with some serious perks for investors. Here’s why:
Each side of a dual income is a separate rental property, which means you can claim depreciation on two separate assets. More assets equal more deductions - and that’s great for your bottom line.
Think of all the things in a home that wear out over time - carpets, blinds, dishwashers, ovens. Since a dual income has two separate residences, you’re looking at more claimable plant and equipment assets, which means higher depreciation benefits.
The brand-new dual income house gives you a $10,841 tax refund, compared to just $4,181 from the 5-year-old house.
Capital works deductions cover the structure of the building - think walls, roofs, and fixed installations. Since dual incomes are larger and require more materials and labour than a standard house, they come with higher construction costs. And because depreciation is based on those costs, that means bigger deductions for you over time.
Understanding how depreciation works can help you maximise your tax savings. Here’s how to make the most of it:
New properties and dual incomes offer significant depreciation benefits. By choosing the right investment and leveraging depreciation benefits, you can put more money back in your pocket and improve your overall return on investment.
Thinking about investing? Make sure you factor depreciation into your decision - it could make all the difference!
The information provided is general in nature, it does not take your personal objectives, circumstances or needs into account. It is not specific advice and is not intended to be passed on or relied upon. Any indicative information and assumptions used may change without notice, particularly if based on past performance. Interest rates are subject to change. Finance approval is subject to terms and conditions and meeting lender approval criteria.
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