Choosing between new and established properties involves weighing various factors, including tax benefits. New properties generally offer more substantial tax advantages, primarily through depreciation claims. However, established properties might suit different investment strategies better.
Tax Benefits of New Properties
New properties often provide greater tax benefits due to higher depreciation deductions. Under Division 40 of the ITAA 1997, investors can claim depreciation on plant and equipment, such as carpets and appliances, which are typically new in a newly built property. Additionally, Division 43 allows for capital works deductions on the building structure, usually at a rate of 2.5% per annum over 40 years. A common misconception is that all properties offer the same depreciation potential, but new properties can significantly enhance your tax position.
Tax Benefits of Established Properties
While established properties might not offer the same level of depreciation benefits, they have other potential advantages. Existing homes can be more affordable and located in well-established areas with proven growth potential. However, for properties acquired after 7:30pm AEST on 9 May 2017, the ability to claim Division 40 depreciation on previously used plant and equipment was removed unless the property was already owned before this date.
How This Works in Practice
Consider a brand-new 3-bedroom apartment in Melbourne purchased for $800,000. As a new property, you can claim depreciation on plant and equipment and capital works. Suppose the first-year depreciation claim totals $15,000. At a 37% marginal tax rate, this could reduce your tax liability by $5,550. In contrast, an established property of the same value might only allow for capital works deductions, significantly reducing the depreciation claimable.
Professional Insight
In our experience, investors often overlook the long-term tax implications when choosing between new and established properties. One thing we frequently see is investors focusing solely on initial purchase price without considering ongoing tax benefits. What most investors don't realise is that even though new properties might have a higher initial cost, the depreciation benefits can make a substantial difference over time. Additionally, the choice of property should align with your broader investment strategy, not just tax benefits.
When Does the Answer Change?
When Should You Seek Professional Advice?
Tax benefits depend significantly on individual circumstances, including your income, investment goals, and the type of property. A Chartered Quantity Surveyor can provide a detailed depreciation schedule, while an accountant can integrate this into your broader tax strategy. Professional advice is crucial to ensure you maximise your tax benefits and make informed decisions.