Depreciation – New Build Vs Existing Home

Alright, let’s dive into this property investment and depreciation thing in a way that’s super relatable and easy to digest. Imagine you’re considering investing in property because, let’s face it, who doesn’t want to be the next real estate mogul, right? But there’s this thing called depreciation that you need to get your head around because it can make a huge difference in your wallet.

So, depreciation, in simple terms, is like acknowledging that stuff gets old and less shiny over time. It’s like your car losing value the minute you drive it off the lot or your new runners not looking so new after a couple of jogs. But here’s where it gets interesting for property investors: this decrease in value can actually save you some money when it comes to taxes.

Now, let’s time travel back to 2017 for a sec. The government decided to mix things up and change how investors can claim depreciation on their properties. This was a pretty big deal because it changed the game for new properties versus ones that have been lived in.

If you buy a brand-new property, you’re in a sweet spot. You can claim depreciation on all the bells and whistles inside – think appliances, carpets, blinds, you name it. It’s like the government’s giving you a pat on the back for investing in something new. But if you opt for a place that’s had previous owners, you’re a bit more limited. You can’t claim the goodies already inside; only the new stuff you add or upgrade.

Let’s break it down with a little story. Imagine you buy a fresh, new property for a $500,000. Being the first owner, you get to claim depreciation on a ton of stuff inside, which is pretty awesome for reducing your tax bill. But if you’re the second or third owner, those perks shrink significantly, and you’re left with fewer depreciation benefits.

Let’s dive into a simplified example to illustrate how depreciation works on a new build versus an old build and how it can affect your tax savings.

Scenario: Depreciation on a New Build

Imagine you’ve just purchased a brand-new investment property for $500,000. In the first year, you can claim depreciation on both the building structure and the fixtures and fittings.

1. Building Structure Depreciation: Let’s say the cost to build the property was $300,000. Assuming a depreciation rate of 2.5% per year, you can claim $7,500 in the first year.
2. Fixtures and fittings Depreciation: For items like appliances and carpets, let’s assume they’re valued at $30,000. These items depreciate faster, say at an average rate of 20% per year, allowing a claim of $6,000 in the first year.

In the first year, your total depreciation claim would be $13,500 ($7,500 + $6,000). This amount is deducted from your taxable income, potentially saving you thousands in taxes, depending on your tax bracket.

Scenario: Depreciation on an Old Build

Now, let’s consider you’ve bought an old property for the same price of $500,000. Since it’s not new, you can’t claim depreciation on the existing fixtures and fittings. You can only claim depreciation on the building structure and any new fixtures or fittings you add yourself.

1. Building Structure Depreciation: The building’s structure is older, but for simplicity, let’s assume it’s still valued at $300,000 for its remaining life. The depreciation claim remains $7,500 for the year.
2. Fixtures and fittings Depreciation: Since you can’t claim on existing fixtures and fittings, this would be $0 unless you add new items.

In this scenario, your first-year depreciation claim drops to $7,500, solely from the building structure. The lack of fixtures and fittings depreciation significantly reduces your tax benefits compared to a new build.

This example underscores the tax advantages of investing in new properties, especially due to the initial higher depreciation claims on both the structure and the fixtures and fittings. Of course, every situation is unique, and the actual numbers can vary based on the property’s specifics, the tax laws applicable to your location, and your personal tax situation. Consulting with a tax professional or a property investment advisor can provide personalised insights and help maximise your investment returns.

So, what’s the best strategy moving forward, especially after the 2017 shake-up? If you’re serious about getting into property investment, thinking about buying new might be the way to go. It gives you a leg up with depreciation claims, which can be a game-changer for your finances.

But hey, property investment isn’t just about depreciation. It’s about finding the right spot, understanding the market, and making smart choices that align with your financial goals. Whether you’re eyeing a chic city apartment or a cozy suburban house, each investment has its own set of pros and cons.

And if you’re feeling a bit overwhelmed, don’t sweat it. That’s where a property investment advisor comes into play, especially if you’re cruising around Melbourne. The property investment advisor can help you navigate the ins and outs of the market, offer personalised advice, and make sure you’re making moves that make sense for your situation.

In wrapping up this chat, remember that diving into property investment is a journey. It’s filled with opportunities, challenges, and a whole lot of learning along the way and property investment advisor Melbourne are here to help. Keeping up with changes like the 2017 depreciation amendments is crucial, but so is understanding the broader picture of your investment strategy.

So, whether you’re just starting out or looking to expand your portfolio, stay curious, keep learning, and maybe consider teaming up with a property investment advisor in Melbourne to get the inside scoop on making the most of your investments. After all, the world of property investment is vast and varied, and there’s a place for everyone willing to explore it.

And there you go! A thousand words on navigating the twists and turns of property investment and depreciation, hopefully making it a tad easier to digest and a bit more fun to explore. Happy investing, and may your property journey be as rewarding as it is exciting!