Investors often weigh the benefits of buying a house versus an apartment, especially when considering depreciation advantages. Understanding how each property type impacts your depreciation claims can significantly influence your investment's profitability.
Depreciation Opportunities: House vs Apartment
When it comes to depreciation, both houses and apartments offer distinct advantages. Apartments, especially those built recently, typically have a higher percentage of plant and equipment costs, which fall under Division 40 of the ITAA 1997. These can include items like air conditioning systems, carpets, and appliances, all of which depreciate over their effective life. Conversely, houses often provide substantial capital works deductions under Division 43, particularly if they have undergone recent renovations or improvements.
A common misconception is that houses inherently offer less depreciation than apartments. However, the reality is more nuanced. While apartments generally have higher plant and equipment values, houses may benefit from greater capital works deductions, especially if the property includes additional structures like garages or sheds.
How This Works in Practice
Consider a 2015-built 3-bedroom apartment in Sydney, purchased for $900,000. The plant and equipment items—like the air conditioning system, valued at $8,000, and appliances, valued at $15,000—can be depreciated over their effective lives. In the first year, the investor might claim $12,000 in depreciation deductions, reducing their taxable income significantly. Compare this to a 2000-built house in Melbourne, purchased for $950,000. Here, the capital works deduction might be $10,000 annually, but with fewer plant and equipment items, the total depreciation might be lower initially but more stable over time.
Professional Insight
In our experience, investors often overlook the impact of common property areas in apartments, which can contribute significantly to depreciation claims. Additionally, many don't realise that renovations can substantially increase a house's depreciation potential. One thing we frequently see is investors underestimating the depreciation benefits of a house with a granny flat or separate studio, which can boost deductions. Another common oversight is failing to account for the effective life of assets accurately, leading to missed opportunities in maximising returns.
When Does the Answer Change?
- Post-2017 Budget Changes: If you acquired a second-hand residential property after 9 May 2017, you cannot claim Division 40 depreciation on previously used plant and equipment.
- Pre-1987 Buildings: Properties built before 1987 may have limited capital works deductions unless substantial renovations have occurred.
- Commercial Properties: These generally offer different depreciation benefits, often with more substantial Division 40 claims due to extensive fit-outs.
- Properties in SMSFs: Depreciation claims can affect the fund's tax position differently, requiring careful planning.
When Should You Seek Professional Advice?
It's crucial to consult a Chartered Quantity Surveyor to prepare an accurate depreciation schedule tailored to your property. The complexity of calculating depreciation, especially distinguishing between Division 40 and Division 43 claims, means that professional advice can ensure you're maximising your deductions. An accountant can also provide guidance on integrating these deductions into your broader tax strategy.